Business Cycle Analysis with Multivariate Markov Switching Models
AbstractThe class of Markov switching models can be extended in two main directions in a multivariate framework. In the first approach, the switching dynamics are introduced by way of a common latent factor. In the second approach a VAR model with parameters depending on one common Markov chain is considered (MSVAR). We will extend the MSVAR approach allowing for the presence of specific Markov chains in each equation of the VAR (MMSVAR). In the MMSVAR approach we also explore the introduction of correlated Markov chains which allow us to evaluate the relationships among phases in different economies or sectors and introduce causality relationships, which allow a more parsimonious representation. We apply our model to study the relationship between cyclical phases of the industrial production in the US and Euro zone. Moreover, we construct a MMS model to explore the cyclical relationship between the Euro zone industrial production and the industrial component of the European Sentiment Index.
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Bibliographic InfoPaper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2007_32.
Date of creation: 2007
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Economic cycles; Multivariate models; Markov switching models; Common latent factors; Causality; Euro-zone;
Find related papers by JEL classification:
- C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - 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
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-02-09 (All new papers)
- NEP-CBA-2008-02-09 (Central Banking)
- NEP-ECM-2008-02-09 (Econometrics)
- NEP-ETS-2008-02-09 (Econometric Time Series)
- NEP-MAC-2008-02-09 (Macroeconomics)
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