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http://hdl.handle.net/2123/8150
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| Title: | Markov-Switching Models with Evolving Regime-Specific Parameters: Are Post-War Booms or Recessions All Alike? |
| Authors: | Kim, Chang-Jin Eo, Yunjong School of Economics |
| Keywords: | Bayesian Approach Business Cycle Counterfactual Prior Evolving Regime- Specific Parameters Hierarchical Prior Markov Switching Hamilton Model MCM State- Space Model |
| Issue Date: | Feb-2012 |
| Publisher: | School of Economics |
| Series/Report no.: | 2012-04 |
| 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 first present a benchmark model, in which each regime-specific mean growth rate evolves according to a random walk process over different episodes of booms or recessions. We then present a model with vector error correction dynamics for the regime-specific mean growth rates, by deriving and imposing a condition for the existence of a long-run equilibrium growth rate for real output. In the Bayesian Markov Chain Monte Carlo (MCMC) approach developed in this paper, the counterfactual priors, as well as the hierarchical priors for the regime-specific parameters, play critical roles. By applying the proposed model and approach to the postwar real GDP growth data (1947Q4-2011Q3), we uncover the evolving nature of the regime-specific mean growth rates of real output in the U.S. business cycle. An additional feature of the postwar U.S. business cycle that we uncover is a steady decline in the long-run equilibrium output growth. The decline started in the mid-1950s and ended in the mid-1980s, coinciding with the beginning of the Great Moderation. Our empirical results also provide partial, if not decisive, evidence that the central bank has been more successful in restoring the economy back to its long-run equilibrium growth path after unusually severe recessions than after unusually good booms. |
| URI: | http://hdl.handle.net/2123/8150 |
| Department/Unit/Centre: | School of Economics |
| Appears in Collections: | Working Papers - Economics |
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