Mapping Economic Landscapes by Clustering and Quantifying Macroeconomic Regimes

Economic regimes—distinct periods defined by specific macroeconomic conditions—serve as a critical framework for interpreting macroeconomic cycles.

Understanding macroeconomic cycles is essential for investors, policymakers, and economists. Economic regimes—distinct periods defined by specific macroeconomic conditions—serve as a critical framework for interpreting these cycles. In this article, we will look how to identify and segregate economic regimes using advanced statistical techniques, highlighting how this approach can provide valuable insights into asset performance and economic forecasting. Drawing on over six decades of data, we apply the Gaussian Mixture Model (GMM) to identify and analyze distinct economic regimes, revealing patterns that can inform dynamic portfolio allocation and policy decisions.

The Concept of Economic Regimes

Economic regimes are characterized by prevailing macroeconomic conditions, including GDP growth, inflation rates, and yield curve behavior. By identifying these regimes, we gain insights into historical trends and can better anticipate future economic shifts. For investors and policymakers, un…