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Regime-dependent impulse response functions in a Markov-switching vector autoregression model

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  • Ehrmann, Michael
  • Ellison, Martin
  • Valla, Natacha

Abstract

In this paper we introduce identifying restrictions into a Markov-switching vector autoregression model. We define a separate set of impulse responses for each Markov regime to show how fundamental disturbances affect the variables in the model dependent on the regime. We go to illustrate the use of these regime-dependent impulse response functions in a model of the U.S. economy. The regimes we identify come close to the “old” and “new economy” regimes found in recent research. We provide evidence that oil price shocks are much less contractionary and inflationary than they used to be. We show furthermore that the decoupling of the US economic performance from oil price shocks cannot be explained by “good luck” alone, but that structural changes within the US economy have taken place.

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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 78 (2003)
Issue (Month): 3 (March)
Pages: 295-299

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Handle: RePEc:eee:ecolet:v:78:y:2003:i:3:p:295-299

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References

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  1. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
  2. Olivier Jean Blanchard & Danny Quah, 1990. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
  3. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  4. Martin Ellison & Natacha Valla, 2000. "Learning, Uncertainty And Central Bank Activism In An Economy With Strategic Interactions," Computing in Economics and Finance 2000 183, Society for Computational Economics.
  5. Hutchison, Michael M., 1993. "Structural change and the macroeconomic effects of oil shocks: empirical evidence from the United States and Japan," Journal of International Money and Finance, Elsevier, vol. 12(6), pages 587-606, December.
  6. Kevin L. Kliesen, 2001. "Rising oil prices and economic turmoil: must they always go hand in hand?," The Regional Economist, Federal Reserve Bank of St. Louis, issue Jan, pages 4-9.
  7. Michael Ehrmann, 2004. "Firm Size and Monetary Policy Transmission – Evidence from German Business Survey Data," CESifo Working Paper Series 1201, CESifo Group Munich.
  8. Krolzig, H.-M. & Toro, J., 1999. "A New Approach to the Analysis of Shocks and the Cycle in a Model of Output and Employment," Economics Working Papers eco99/30, European University Institute.
  9. Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1991. "Stochastic trends and economic fluctuations," Working Paper Series, Macroeconomic Issues 91-4, Federal Reserve Bank of Chicago.
  10. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  11. Christopher Sims & Tao Zha, 2002. "Macroeconomic switching," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  12. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
  13. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
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