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

  • Helmut Herwartz
  • Helmut Luetkepohl

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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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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