Multivariate Markov Switching with Weighted Regime Determination: Giving France More Weight than Finland
Federal Reserve Bank of St. Louis Working Paper No. 2008-001A
25 Pages Posted: 6 Jan 2008
Date Written: January 2008
This article deals with using panel data to infer regime changes that are common to all of the cross section. The methods presented here apply to Markov switching vector autoregressions, dynamic factor models with Markov switching and other multivariate Markov switching models. The key feature we seek to add to these models is to permit cross-sectional units to have different weights in the calculation of regime probabilities. We apply our approach to estimating a business cycle chronology for the 50 U.S. States and the Euro area, and we compare results between country-specific weights and the usual case of equal weights. The model with weighted regime determination suggests that Europe experienced a recession in 2002-03, whereas the usual model with equal weights does not.
Keywords: Vector autoregression, Regime switching, Business Cycle Turning Point
JEL Classification: F42, C25, C22
Suggested Citation: Suggested Citation