The role of economic policy uncertainty in predicting U.S. recessions: A mixed-frequency Markov-switching vector autoregressive approach
Rangan Gupta and
No 2016-14, Economics Discussion Papers from Kiel Institute for the World Economy (IfW Kiel)
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, the authors 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. The 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. The 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; Markov-switching VAR models (search for similar items in EconPapers)
JEL-codes: C32 E32 E37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for, nep-mac and nep-ore
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Journal Article: The role of economic policy uncertainty in predicting U.S. recessions: A mixed-frequency Markov-switching vector autoregressive approach (2016)
Working Paper: The Role of Economic Policy Uncertainty in Predicting U.S. Recessions: A Mixed-Frequency Markov-Switching Vector Autoregressive Approach (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwedp:201614
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