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Structural Vector Autoregressions with Markov Switching: Combining Conventional with Statistical Identification of Shocks

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  • Helmut Herwartz
  • Helmut Luetkepohl

Abstract

In structural vector autoregressive (SVAR) analysis a Markov regime switching (MS) property can be exploited to identify shocks if the reduced form error covariance matrix varies across regimes. Unfortunately, these shocks may not have a meaningful structural economic interpretation. It is discussed how statistical and conventional identifying information can be combined. The discussion is based on a VAR model for the US containing oil prices, output, consumer prices and a short-term interest rate. The system has been used for studying the causes of the early millennium economic slowdown based on traditional identi¯cation with zero and long-run restrictions and using sign restrictions. We find that previously drawn conclusions are questionable in our framework.

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Bibliographic Info

Paper provided by European University Institute in its series Economics Working Papers with number ECO2011/11.

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Date of creation: 2011
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Handle: RePEc:eui:euiwps:eco2011/11

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Related research

Keywords: Vector autoregressive model; Markov process; EM algorithm; impulse responses;

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Cited by:
  1. Anton Velinov, 2013. "Can Stock Price Fundamentals Properly be Captured?: Using Markov Switching in Heteroskedasticity Models to Test Identification Schemes," Discussion Papers of DIW Berlin 1350, DIW Berlin, German Institute for Economic Research.
  2. Netsunajev, Aleksei, 2013. "Reaction to technology shocks in Markov-switching structural VARs: Identification via heteroskedasticity," Journal of Macroeconomics, Elsevier, vol. 36(C), pages 51-62.
  3. Helmut Lütkepohl & Aleksei Netsunajev, 2014. "Structural Vector Autoregressions with Smooth Transition in Variances: The Interaction between U.S. Monetary Policy and the Stock Market," Discussion Papers of DIW Berlin 1388, DIW Berlin, German Institute for Economic Research.
  4. Kohonen, Anssi, 2013. "On detection of volatility spillovers in overlapping stock markets," Journal of Empirical Finance, Elsevier, vol. 22(C), pages 140-158.

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