Markov-switching models with evolving regime-specific parameters: Are postwar booms or recessions all alike?

Yunjong Eo, Chang-Jin Kim

Research output: Contribution to journalArticlepeer-review

6 Citations (Scopus)

Abstract

In this paper,we relax the assumption of constant regime-specific mean growth rates in Hamilton's (1989) two-state Markov-switching model of the business cycle. We introduce a random walk hierarchy prior for each regime-specific mean growth rate and impose a cointegrating relationship between the mean growth rates in recessionary and expansionary periods. By applying the proposed model to postwar U.S. real GDP growth (1947:Q4-2011:Q3), we uncover the evolving nature of the regime-specific mean growth rates of real output in the U.S. business cycle. Additional features of the postwar U.S. business cycle that we uncover include a steady decline in the long-run mean growth rate of real output over the postwar sample and an asymmetric error-correction mechanism when the economy deviates from its long-run equilibrium.

Original languageEnglish
Pages (from-to)940-949
Number of pages10
JournalReview of Economics and Statistics
Volume98
Issue number5
DOIs
Publication statusPublished - 2016 Dec 1
Externally publishedYes

ASJC Scopus subject areas

  • Social Sciences (miscellaneous)
  • Economics and Econometrics

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