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Markov-Switching Structural Vector Autoregressions: Theory and Application

FRB of Atlanta Working Paper No. 2005-27

48 Pages Posted: 19 Dec 2005  

Juan Francisco Rubio-Ramirez

Federal Reserve Bank of Atlanta - Research Department

Daniel F. Waggoner

Federal Reserve Bank of Atlanta

Tao A. Zha

Federal Reserve Bank of Atlanta

Date Written: December 2005

Abstract

This paper develops a new and easily implementable necessary and sufficient condition for the exact identification of a Markov-switching structural vector autoregression (SVAR) model. The theorem applies to models with both linear and some nonlinear restrictions on the structural parameters. We also derive efficient MCMC algorithms to implement sign and long-run restrictions in Markov-switching SVARs. Using our methods, four well-known identification schemes are used to study whether monetary policy has changed in the euro area since the introduction of the European Monetary Union. We find that models restricted to only time-varying shock variances dominate the other models. We find a persistent post-1993 regime that is associated with low volatility of shocks to output, prices, and interest rates. Finally, the output effects of monetary policy shocks are small and uncertain across regimes and models. These results are robust to the four identification schemes studied in this paper.

Keywords: Markov switching, regime changes, volatility, identification

JEL Classification: C32, E10

Suggested Citation

Rubio-Ramirez, Juan Francisco and Waggoner, Daniel F. and Zha, Tao A., Markov-Switching Structural Vector Autoregressions: Theory and Application (December 2005). FRB of Atlanta Working Paper No. 2005-27. Available at SSRN: https://ssrn.com/abstract=870478 or http://dx.doi.org/10.2139/ssrn.870478

Juan Francisco Rubio-Ramirez (Contact Author)

Federal Reserve Bank of Atlanta - Research Department ( email )

1000 Peachtree Street, NE
Atlanta, GA 30309-4470
United States
404-498-8057 (Phone)
404-498-8956 (Fax)

HOME PAGE: http://www.econ.umn.edu/~rubio

Daniel F. Waggoner

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
404-521-8278 (Phone)
404-521-8810 (Fax)

Tao A. Zha

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
404-521-8353 (Phone)
404-521-8956 (Fax)

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