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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 ()
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Mawuli Segnon: Department of Economics, University of Kiel, Germany

No 201558, Working Papers from University of Pretoria, Department of Economics

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, we 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. Our 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. Our 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; Markovswitching VAR models (search for similar items in EconPapers)
JEL-codes: C32 E32 E37 (search for similar items in EconPapers)
Pages: 13 pages
Date: 2015-08
New Economics Papers: this item is included in nep-for, nep-mac and nep-ore
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Related works:
Journal Article: The role of economic policy uncertainty in predicting U.S. recessions: A mixed-frequency Markov-switching vector autoregressive approach (2016) Downloads
Working Paper: The role of economic policy uncertainty in predicting U.S. recessions: A mixed-frequency Markov-switching vector autoregressive approach (2016) Downloads
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