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

Author

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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.

Suggested Citation

  • Helmut Herwartz & Helmut Luetkepohl, 2011. "Structural Vector Autoregressions with Markov Switching: Combining Conventional with Statistical Identification of Shocks," Economics Working Papers ECO2011/11, European University Institute.
    • Handle: RePEc:eui:euiwps:eco2011/11
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    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

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