The role of economic policy uncertainty in predicting U.S. recessions: A mixed-frequency Markov-switching vector autoregressive approach

Mehmet Balcilar, Rangan Gupta and Mawuli Segnon

No 2016-14, Economics Discussion Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: This paper analyzes the performance of the monthly economic policy uncertainty (EPU) index in predicting recessionary regimes of the (quarterly) U.S. GDP. In this regard, the authors apply a mixed-frequency Markov-switching vector autoregressive (MF-MSVAR) model, and compare its in-sample and out-of-sample forecasting performances to those of a Markov-switching vector autoregressive model (MS-VAR, where the EPU is averaged over the months to produce quarterly values) and a Markov-switching autoregressive (MS-AR) model. The results show that the MF-MS-VAR fits the different recession regimes, and provides out-of-sample forecasts of recession probabilities which are more accurate than those derived from the MS-VAR and MS-AR models. The results highlight the importance of using high-frequency values of the EPU, and not averaging them to obtain quarterly values, when forecasting recessionary regimes for the U.S. economy.

Keywords: business cycles; economic policy uncertainty; mixed frequency; Markov-switching VAR models (search for similar items in EconPapers)
JEL-codes: C32 E32 E37 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-for, nep-mac and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (50)

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https://www.econstor.eu/bitstream/10419/129778/1/853815135.pdf (application/pdf)

Related works:
Journal Article: The role of economic policy uncertainty in predicting U.S. recessions: A mixed-frequency Markov-switching vector autoregressive approach (2016)
Working Paper: The Role of Economic Policy Uncertainty in Predicting U.S. Recessions: A Mixed-Frequency Markov-Switching Vector Autoregressive Approach (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwedp:201614

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