TY - JOUR
T1 - Markov-switching and the Beveridge-Nelson decomposition
T2 - Has US output persistence changed since 1984?
AU - Kim, Chang Jin
N1 - Funding Information:
The author would like to thank Dong-Heon Kim, James Morley, Jim Nason, two anonymous referees, and the participants of the conference in honor of the 25th anniversary of Seminal research by Stephen Beveridge and Charles R. Nelson for helpful comments and suggestions. The author acknowledge financial support from Korea Research Foundation Grant (KRF-2007-327-B00086), the Bryan C. Cressey Professorship at the University of Washington and the Korea University Special Grant.
PY - 2008/10
Y1 - 2008/10
N2 - We show that, for a class of univariate and multivariate Markov-switching models, exact calculation of the Beveridge-Nelson (BN) trend/cycle components is possible. The key to exact BN trend/cycle decomposition is to recognize that the latent first-order Markov-switching process in the model has an AR(1) representation, and that the model can be cast into a state-space form. Given the state-space representation, we show that impulse-response function analysis can be processed with respect to either an asymmetric discrete shock or to a symmetric continuous shock. The method presented is applied to Kim, Morley, Piger's [Kim, C.-J., Morley, J., Piger, J., 2005. Nonlinearity and the permanent effects of recessions. Journal of Applied Econometrics 20, 291-309] univariate Markov-switching model of real GDP with a post-recession 'bounce-back' effect and Cochrane's [Cochrane, J.H., 1994. Permanent and transitory components of GNP and stock prices. Quarterly Journal of Economics 109, 241-263] vector error correction model of real GDP and real consumption extended to incorporate Markov-switching. The parameter estimates, the BN trend/cycle components, and the impulse-response function analysis for each of these empirical models suggest that the persistence of US real GDP has increased since the mid-1980's.
AB - We show that, for a class of univariate and multivariate Markov-switching models, exact calculation of the Beveridge-Nelson (BN) trend/cycle components is possible. The key to exact BN trend/cycle decomposition is to recognize that the latent first-order Markov-switching process in the model has an AR(1) representation, and that the model can be cast into a state-space form. Given the state-space representation, we show that impulse-response function analysis can be processed with respect to either an asymmetric discrete shock or to a symmetric continuous shock. The method presented is applied to Kim, Morley, Piger's [Kim, C.-J., Morley, J., Piger, J., 2005. Nonlinearity and the permanent effects of recessions. Journal of Applied Econometrics 20, 291-309] univariate Markov-switching model of real GDP with a post-recession 'bounce-back' effect and Cochrane's [Cochrane, J.H., 1994. Permanent and transitory components of GNP and stock prices. Quarterly Journal of Economics 109, 241-263] vector error correction model of real GDP and real consumption extended to incorporate Markov-switching. The parameter estimates, the BN trend/cycle components, and the impulse-response function analysis for each of these empirical models suggest that the persistence of US real GDP has increased since the mid-1980's.
KW - Beveridge-Nelson decomposition
KW - Impulse-response function
KW - Markov switching
KW - Persistence of real output
KW - State-space representation
UR - http://www.scopus.com/inward/record.url?scp=53649101143&partnerID=8YFLogxK
U2 - 10.1016/j.jeconom.2008.08.014
DO - 10.1016/j.jeconom.2008.08.014
M3 - Article
AN - SCOPUS:53649101143
SN - 0304-4076
VL - 146
SP - 227
EP - 240
JO - Journal of Econometrics
JF - Journal of Econometrics
IS - 2
ER -