Markov-switching and the Beveridge-Nelson decomposition: Has US output persistence changed since 1984?

Chang Jin Kim

Research output: Contribution to journalArticlepeer-review

5 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)227-240
Number of pages14
JournalJournal of Econometrics
Volume146
Issue number2
DOIs
Publication statusPublished - 2008 Oct

Bibliographical note

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.

Keywords

  • Beveridge-Nelson decomposition
  • Impulse-response function
  • Markov switching
  • Persistence of real output
  • State-space representation

ASJC Scopus subject areas

  • Economics and Econometrics

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