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Interactions between Eurozone and US Booms and Busts: A Bayesian Panel Markov-switching VAR Model

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Author Info

  • Monica Billio

    (University of Venice, GRETA Assoc. and School for Advanced Studies in Venice, Italy)

  • Roberto Casarin

    (University of Venice, GRETA Assoc. and School for Advanced Studies in Venice, Italy)

  • Francesco Ravazzolo

    (Norges Bank and BI Norwegian Business School, Norway)

  • Herman K. van Dijk

    (Erasmus University Rotterdam, and VU University Amsterdam, The Netherlands)

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    Abstract

    Interactions between the eurozone and US booms and busts and among major eurozone economies are analyzed by introducing a panel Markov-switching VAR model well suitable for a multi-country cyclical analysis. The model accommodates changes in low and high data frequencies and endogenous time-varying transition matrices of the country-specific Markov chains. The transition matrix of each Markov chain depends on its own past history and on the history of the other chains, thus allowing for modeling of the interactions between cycles. An endogenous common eurozone cycle is derived by aggregating country-specific cycles. The model is estimated using a simulation based Bayesian approach in which an efficient multi-move strategy algorithm is defined to draw common time-varying Markov-switching chains. Our results show that the US and eurozone cycles are not fully synchronized over the 1991-2013 sample period, with evidence of more recessions in the Eurozone. Shocks affect the US 1-quarter in advance of the eurozone, but these spread very rapidly among economies. An increase in the number of eurozone countries in recession increases the probability of the US to stay within recession, while the US recession indicator has a negative impact on the probability to stay in recession for eurozone countries. Turning point analysis shows that the cycles of Germany, France and Italy are closer to the US cycle than other countries. Belgium, Spain, and Germany, provide more timely information on the aggregate recession than Netherlands and France.

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    File URL: http://papers.tinbergen.nl/13142.pdf
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    Bibliographic Info

    Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 13-142/III.

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    Date of creation: 16 Sep 2013
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    Handle: RePEc:dgr:uvatin:20130142

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    Web page: http://www.tinbergen.nl

    Related research

    Keywords: Bayesian Model; Panel VAR; Markov-switching; International Business Cycles; Interaction Mechanism;

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    References

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