Abstract
In this paper,we relax the assumption of constant regime-specific mean growth rates in Hamilton's (1989) two-state Markov-switching model of the business cycle. We introduce a random walk hierarchy prior for each regime-specific mean growth rate and impose a cointegrating relationship between the mean growth rates in recessionary and expansionary periods. By applying the proposed model to postwar U.S. real GDP growth (1947:Q4-2011:Q3), we uncover the evolving nature of the regime-specific mean growth rates of real output in the U.S. business cycle. Additional features of the postwar U.S. business cycle that we uncover include a steady decline in the long-run mean growth rate of real output over the postwar sample and an asymmetric error-correction mechanism when the economy deviates from its long-run equilibrium.
Original language | English |
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Pages (from-to) | 940-949 |
Number of pages | 10 |
Journal | Review of Economics and Statistics |
Volume | 98 |
Issue number | 5 |
DOIs | |
Publication status | Published - 2016 Dec 1 |
Bibliographical note
Publisher Copyright:© 2016 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
ASJC Scopus subject areas
- Social Sciences (miscellaneous)
- Economics and Econometrics