Incorporating Vintage Differences and Forecasts into Markov Switching Models

47 Pages Posted: 12 Jul 2007

See all articles by Jeremy Nalewaik

Jeremy Nalewaik

Board of Governors of the Federal Reserve System

Date Written: May 2007

Abstract

This paper discusses extensions of standard Markov switching models that allow estimated probabilities to reflect parameter breaks at or close to the end of the sample, too close for standard maximum likelihood techniques to produce precise parameter estimates. The basic technique is a supplementary estimation procedure, bringing additional information to bear to estimate the statistical properties of the end-of-sample observations that behave differently from the rest. Empirical results using real-time data show that these techniques improve the ability of a Markov switching model based on GDP and GDI to recognize the start of the 2001 recession.

Keywords: Recessions, Markov Switching Models

JEL Classification: E32

Suggested Citation

Nalewaik, Jeremy John, Incorporating Vintage Differences and Forecasts into Markov Switching Models (May 2007). FEDS Working Paper No. 2007-23. Available at SSRN: https://ssrn.com/abstract=999593 or http://dx.doi.org/10.2139/ssrn.999593

Jeremy John Nalewaik (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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