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Modelling Multiple Regimes in the Business Cycle

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  • van Dijk, D.J.C.
  • Franses, Ph.H.B.F.

Abstract

The interest in business cycle asymmetry has been steadily increasing over the last fifteen years. Most research has focused on the different behaviour of macroeconomic variables during expansions and contractions, which by now is well documented. Recent evidence suggests that such a two-phase characterization of the business cycle might be too restrictive. In particular, it might be worthwhile to decompose the recovery phase in a high-growth phase (immediately following the trough of a cycle) and a subsequent moderate-growth phase. In this paper, the issue of multiple regimes is addressed using Smooth Transition AutoRegressive [STAR] models. A possible limitation of STAR models as they are currently used is that essentially they deal with only two regimes. We propose a generalization of the STAR model such that more than two regimes can be accommodated. It is demonstrated that the class of Multiple Regime STAR [MRSTAR] models can be obtained from the two-regime model in an elegant way. The main properties of the MRSTAR model and several issues which might be relevant for empirical specification are discussed in detail. In particular, a Lagrange Multiplier-type test is derived which can be used to determine the appropriate number of regimes. Application of the new model class to US real GNP and US unemployment rate provides evidence in favor of the existence of multiple business cycle phases.

Suggested Citation

  • van Dijk, D.J.C. & Franses, Ph.H.B.F., 1997. "Modelling Multiple Regimes in the Business Cycle," Econometric Institute Research Papers EI 9734/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  • Handle: RePEc:ems:eureir:1407
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    References listed on IDEAS

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    More about this item

    Keywords

    Lagrange multiplier test; business cycle asymmetry; multiple regimes; smooth transition autoregression;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single 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

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