I'm trying to replicate NBER's business cycle dating which consists of a binary dummy variable with 0 = expansion, 1 = recession.
The way I've done this is by taking the 6 underlying economic indicators, transforming the measures to annual growth rates and taking a simple average to form a composite indicator. This produces a continuous variable which is then transformed to a dummy variable using an if function.
My questions are as follows:
- Is taking a simple average the correct way to create the composite index or should the data first be standardized (using z-scores?)
- Does it make sense to run an OLS regression to test the model fit vs the NBER? Or is this somehow not statistically correct when using dummies for both dependent and independent variables?