Multivariate Markov Switching Common Factor Models for the UK

17 Pages Posted: 22 Jun 2003

See all articles by Terence C. Mills

Terence C. Mills

Loughborough University - Department of Economics

Ping Wang

Loughborough University - Department of Economics

Abstract

We estimate a model that incorporates two key features of business cycles, comovement among economic variables and switching between regimes of boom and slump, to quarterly UK data for the last four decades. A common factor, interpreted as a composite indicator of coincident variables, and estimates of turning points from one regime to the other, are extracted from the data by using the Kalman filter and maximum likelihood estimation. Both comovement and regime switching are found to be important features of the UK business cycle. The composite indicator produces a sensible representation of the cycle and the estimated turning points agree fairly well with independently determined chronologies. These estimates are sharper than those produced by a univariate Markov switching model of GDP alone. A fairly typical stylized fact of business cycles is confirmed by this model - recessions are steeper and shorter than recoveries.

Suggested Citation

Mills, Terence C. and Wang, Ping, Multivariate Markov Switching Common Factor Models for the UK. Available at SSRN: https://ssrn.com/abstract=416330

Terence C. Mills (Contact Author)

Loughborough University - Department of Economics ( email )

York House
Loughborough LE11 3TU
Great Britain
+44 1509 222703 (Phone)
+44 1509 223910 (Fax)

Ping Wang

Loughborough University - Department of Economics ( email )

York House
Loughborough LE11 3TU
Great Britain

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