Interactions between Eurozone and US Booms and Busts: A Bayesian Panel Markov-switching VAR Model

Monica Billio, Roberto Casarin, Francesco Ravazzolo and Herman van Dijk

No 13-142/III, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: Interactions between the eurozone and US booms and busts and among major eurozone economies are analyzed by introducing a panel Markov-switching VAR model well suitable for a multi-country cyclical analysis. The model accommodates changes in low and high data frequencies and endogenous time-varying transition matrices of the country-specific Markov chains. The transition matrix of each Markov chain depends on its own past history and on the history of the other chains, thus allowing for modeling of the interactions between cycles. An endogenous common eurozone cycle is derived by aggregating country-specific cycles. The model is estimated using a simulation based Bayesian approach in which an efficient multi-move strategy algorithm is defined to draw common time-varying Markov-switching chains. Our results show that the US and eurozone cycles are not fully synchronized over the 1991-2013 sample period, with evidence of more recessions in the Eurozone. Shocks affect the US 1-quarter in advance of the eurozone, but these spread very rapidly among economies. An increase in the number of eurozone countries in recession increases the probability of the US to stay within recession, while the US recession indicator has a negative impact on the probability to stay in recession for eurozone countries. Turning point analysis shows that the cycles of Germany, France and Italy are closer to the US cycle than other countries. Belgium, Spain, and Germany, provide more timely information on the aggregate recession than Netherlands and France.

Keywords: Bayesian Model; Panel VAR; Markov-switching; International Business Cycles; Interaction Mechanism (search for similar items in EconPapers)
JEL-codes: C11 C15 C53 E37 (search for similar items in EconPapers)
Date: 2013-09-16, Revised 2014-11-01
New Economics Papers: this item is included in nep-ets and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Interactions between eurozone and US booms and busts: A Bayesian panel Markov-switching VAR model (2014)
Working Paper: Interactions between eurozone and US booms and busts: A Bayesian panel Markov-switching VAR model (2014)
Working Paper: Interactions between eurozone and US booms and busts: A Bayesian panel Markov-switching VAR model (2013)
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