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K-state switching models with endogenous transition distributions

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  • Sylvia Kaufmann

Abstract

Two Bayesian sampling schemes are outlined to estimate a K-state Markov switching model with time-varying transition probabilities. The multinomial logit model for the transition probabilities is alternatively expressed as a random utility model and as a difference random utility model. The estimation uses data augmentation and both sampling schemes can be based on Gibbs sampling. Based on the model estimate, we are able to discriminate the model against a smooth transition model, in which the state probability may be influenced by a variable, but without depending on the past prevailing state. Formulating a definition allows to determine the relevant threshold level of the covariate influencing the transition distribution without resorting to the usual grid search. Identification issues are addressed with random permutation sampling. In terms of efficiency the extension to difference random utility in combination with random permutation sampling performs best. To illustrate the method, we estimate a two-pillar Phillips curve for the euro area, in which the inflation rate depends on the low-frequency components of M3 growth, real GDP growth and the change in the government bond yield, and on the highfrequency component of the output gap. Using recent data series, the effect of the low-frequency component of M3 growth depends on regimes determined by lagged credit growth.

Suggested Citation

  • Sylvia Kaufmann, 2011. "K-state switching models with endogenous transition distributions," Working Papers 2011-13, Swiss National Bank.
  • Handle: RePEc:snb:snbwpa:2011-13
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    Cited by:

    1. Monica Billio & Roberto Casarin & Francesco Ravazzolo & Herman K. van Dijk, 2013. "Interactions between eurozone and US booms and busts: A Bayesian panel Markov-switching VAR model," Working Papers 2013:17, Department of Economics, University of Venice "Ca' Foscari", revised 2014.
    2. Andrea Eross & Andrew Urquhart & Simon Wolfe, 2019. "Investigating risk contagion initiated by endogenous liquidity shocks: evidence from the US and eurozone interbank markets," The European Journal of Finance, Taylor & Francis Journals, vol. 25(1), pages 35-53, January.
    3. Gaggl, Paul & Kaufmann, Sylvia, 2020. "The cyclical component of labor market polarization and jobless recoveries in the US," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 334-347.

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    More about this item

    Keywords

    Bayesian analysis; credit; M3 growth; Markov switching; Phillips curve; permutation sampling; threshold level; time-varying probabilities;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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