Markov-switching and the Beveridge-Nelson decomposition: Has US output persistence changed since 1984?

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Abstract

We show that, for a class of univariate and multivariate Markov-switching models, exact calculation of the Beveridge-Nelson (BN) trend/cycle components is possible. The key to exact BN trend/cycle decomposition is to recognize that the latent first-order Markov-switching process in the model has an AR(1) representation, and that the model can be cast into a state-space form. Given the state-space representation, we show that impulse-response function analysis can be processed with respect to either an asymmetric discrete shock or to a symmetric continuous shock. The method presented is applied to Kim, Morley, Piger's [Kim, C.-J., Morley, J., Piger, J., 2005. Nonlinearity and the permanent effects of recessions. Journal of Applied Econometrics 20, 291-309] univariate Markov-switching model of real GDP with a post-recession 'bounce-back' effect and Cochrane's [Cochrane, J.H., 1994. Permanent and transitory components of GNP and stock prices. Quarterly Journal of Economics 109, 241-263] vector error correction model of real GDP and real consumption extended to incorporate Markov-switching. The parameter estimates, the BN trend/cycle components, and the impulse-response function analysis for each of these empirical models suggest that the persistence of US real GDP has increased since the mid-1980's.

Original languageEnglish
Pages (from-to)227-240
Number of pages14
JournalJournal of Econometrics
Volume146
Issue number2
DOIs
Publication statusPublished - 2008 Oct 1

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Keywords

  • Beveridge-Nelson decomposition
  • Impulse-response function
  • Markov switching
  • Persistence of real output
  • State-space representation

ASJC Scopus subject areas

  • Economics and Econometrics
  • Applied Mathematics
  • History and Philosophy of Science

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