Higher moments of MSVARs and the business cycle

Alexander Karalis Isaac
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Alexander Karalis Isaac: Birkbeck, University of London

No 1405, BCAM Working Papers from Birkbeck Centre for Applied Macroeconomics

Abstract: I derive the first four moments of the Markov-switching VAR and use the results to reconsider the conflict between the Great Moderation and Financial Crisis literatures. In contrast to the linear model, a three-regime Markov-switching model captures the skewness and kurtosis of US GDP growth 1954-2011. However, a specification with four regimes splits the sample in 1984, a result familiar from the Great Moderation literature. The higher moments of the MSVAR, not previously studied in the literature, reveal the Great Moderation to be a trade off between variance and kurtosis. U.S. GDP growth shifts from an almost Gaussian structure 1954-84 into a pattern with low variance, negative skewness and high kurtosis. The Markov-switching model which splits the sample accurately captures the new moment structure.

Date: 2014-10
New Economics Papers: this item is included in nep-ets and nep-mac
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