A Test for Structural Change in Markov-Switching Models: Has the U.S. Economy Become More Stable?

34 Pages Posted: 12 Mar 1999

See all articles by Chang-Jin Kim

Chang-Jin Kim

Korea University; Dept. of Economics, University of Washington

Charles R. Nelson

Dept of Economics

Abstract

We develop a Bayesian test for structural change at an unknown changepoint in Markov-switching models. Unlike the usual Bayesian treatment of the unknown changepoint problem in the literature, we cast the problem into a `model selection' framework. This is done by adopting a prior for the shift parameters that is a mixture of a truncated Normal and point mass at 0. That is, instead of making an inference on structural change indirectly based on the posterior distribution of the changepoint, we make an inference directly based on the posterior probabilities that the shift parameters are 0. When the proposed framework and procedure are applied to the Markov-switching models of postwar real GNP growth and the fixed real investment growth, we find sample evidence in favor of a structural shift toward narrowing gap between the growth rates during booms and recessions. We interpret this as a structural change in the postwar U.S. economy toward more stability.

JEL Classification: C22, C32

Suggested Citation

Kim, Chang-Jin and Nelson, Charles R., A Test for Structural Change in Markov-Switching Models: Has the U.S. Economy Become More Stable?. Available at SSRN: https://ssrn.com/abstract=148308 or http://dx.doi.org/10.2139/ssrn.148308

Chang-Jin Kim (Contact Author)

Korea University ( email )

Anam-dong, Sungbuk-Ku
Dept. of Economics, Korea University
Seoul 136-701
Korea

HOME PAGE: http://econ.korea.ac.kr/~cjkim/

Dept. of Economics, University of Washington ( email )

Department of Economics (Box 353330)
University of Washington
Seattle, WA 98195-3330
United States

HOME PAGE: http://econ.korea.ac.kr/~cjkim/

Charles R. Nelson

Dept of Economics ( email )

Box 353330
Seattle, WA 98195-3330
United States

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