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Contagious Switching

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  • Michael T. Owyang
  • Jeremy M. Piger
  • Daniel Soques

Abstract

We analyze the propagation of recessions across countries. We construct a model that allows for multiple qualitative state variables in a vector autoregression (VAR) setting. The VAR structure allows us to include country-level variables to determine whether policy also propagates across countries. We consider two different versions of the model. One version assumes the discrete state of the economy (expansion or recession) is observed. The other assumes that the state of the economy is unobserved and must be inferred from movements in economic growth. We apply the model to Canada, Mexico, and the United States to test if spillover effects were similar before and after the North American Free Trade Agreement (NAFTA). We find that trade liberalization has increased the degree of business cycle propagation across the three countries.

Suggested Citation

  • Michael T. Owyang & Jeremy M. Piger & Daniel Soques, 2019. "Contagious Switching," Working Papers 2019-014, Federal Reserve Bank of St. Louis, revised 28 Feb 2021.
    • Handle: RePEc:fip:fedlwp:2019-014
    DOI: 10.20955/wp.2019.014
    Note: Publisher DOI: https://doi.org/10.1002/jae.2874
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    Cited by:

    1. Agudze, Komla M. & Billio, Monica & Casarin, Roberto & Ravazzolo, Francesco, 2022. "Markov switching panel with endogenous synchronization effects," Journal of Econometrics, Elsevier, vol. 230(2), pages 281-298.
    2. Vatsa, Puneet, 2021. "Have Business Cycles Become More Synchronous After NAFTA?," American Business Review, Pompea College of Business, University of New Haven, vol. 24(1), pages 54-66, May.

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    More about this item

    Keywords

    time varying transition probabilities; NAFTA; business cycle synchronization;
    All these keywords.

    JEL classification:

    • 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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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