The role of expectations for economic fluctuations has received considerable attention in recent business cycle analysis. We exploit Markov regime switching models to identify shocks in cointegrated structural vector autoregressions and investigate different identification schemes for bivariate systems comprising U.S. stock prices and total factor productivity. The former variable is viewed as re°ecting expectations of economic agents about future productivity. It is found that some previously used identification schemes can be rejected in our model setup. The results crucially depend on the measure used for total factor productivity.
More papers in Economics Working Papers from European University Institute Address: Badia Fiesolana, Via dei Roccettini, 9, 50016 San Domenico di Fiesole (FI) Italy Contact information at EDIRC. Series data maintained by Marcia Gastaldo ().