Business Cycle Analysis with Multivariate Markov Switching Models

Monica Billio (), Jacques Anas, Laurent Ferrara () and Marco Lo Duca
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Jacques Anas: Coe Rexecode, Paris
Marco Lo Duca: European Central Bank

No 2007_32, Working Papers from University of Venice "Ca' Foscari", Department of Economics

Abstract: The class of Markov switching models can be extended in two main directions in a multivariate framework. In the first approach, the switching dynamics are introduced by way of a common latent factor. In the second approach a VAR model with parameters depending on one common Markov chain is considered (MSVAR). We will extend the MSVAR approach allowing for the presence of specific Markov chains in each equation of the VAR (MMSVAR). In the MMSVAR approach we also explore the introduction of correlated Markov chains which allow us to evaluate the relationships among phases in different economies or sectors and introduce causality relationships, which allow a more parsimonious representation. We apply our model to study the relationship between cyclical phases of the industrial production in the US and Euro zone. Moreover, we construct a MMS model to explore the cyclical relationship between the Euro zone industrial production and the industrial component of the European Sentiment Index.

Keywords: Economic cycles; Multivariate models; Markov switching models; Common latent factors; Causality; Euro-zone (search for similar items in EconPapers)
JEL-codes: C50 C32 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-ets and nep-mac
Date: Written
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