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Regime-Dependent Effects of Uncertainty Shocks. A Markov-Switching Approach for Central Eastern European Countries

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  • Georgiana Plesa

    (Bucharest University of Economic Studies, Romania)

Abstract

Over the past decades, the Central Eastern European (CEE) economies have experienced events characterized by a high degree of uncertainty that have had adverse and persistent effects at the macroeconomic level. This paper analyzes the asymmetric effects of uncertainty shocks (alternately defined by a financial stress index and implied volatility) in two distinct regimes. Structural sudden regime shifts from a high-volatility regime to a low-volatility one are modeled using Markov-switching vector autoregressive models with sign restrictions, given that the probability transition matrix is either time-invariant or time-variant. Our results on key macroeconomic monthly indicators (industrial production, inflation, interest rate) suggest that uncertainty shocks produce significant short-term effects on industrial production and inflation, slightly different in these two regimes, along with a persistent effect on the interest rate.

Suggested Citation

  • Georgiana Plesa, 2024. "Regime-Dependent Effects of Uncertainty Shocks. A Markov-Switching Approach for Central Eastern European Countries," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 74(1), pages 105-140, March.
    • Handle: RePEc:fau:fauart:v:74:y:2024:i:1:p:105-140
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    File URL: https://journal.fsv.cuni.cz/mag/article/show/id/1530
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    More about this item

    Keywords

    Markov-switching; uncertainty shocks; time-varying probability; high-low volatility regimes;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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