Granger-causality in Markov Switching Models

Monica Billio () and Silvestro Di Sanzo
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Silvestro Di Sanzo: Departamento de Fundamentos del Analisis Economico, Universidad de Alicante

No 2006_20, Working Papers from University of Venice "Ca' Foscari", Department of Economics

Abstract: In this paper we propose a new parametrisation of transition probabilities that allows us to characterize and test Granger-causality in Markov switching models by means of an appropriate specification of the transition matrix. Test for independence are also provided. We illustrate our methodology with an empirical application. In particular, we investigate the causality and interdependence between financial and economic cycles using a bivariate Markov switching model. When applied to U.S. data, we find that financial variables are useful for forecasting the direction of aggregate economic activity, and vice versa.

Keywords: Granger Causality; Markov Chains; Switching Models (search for similar items in EconPapers)
JEL-codes: C53 C32 (search for similar items in EconPapers)
Date: Written
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