Abstract
This paper proposes a flexible model that allows for recent changes observed in the US business cycle in the last six decades. It proposes a Markov switching model with three Markov processes to characterize the dynamics of US output fluctuations. We consider the possibility that both the mean and the variance of growth rates of real GDP can have short run fluctuations in addition to the possibility of a long run permanent break. We find that, differently from several alternative specifications in the literature, the proposed flexible framework successfully represents all business cycle phases, including the Great Recession. In addition, we find that the volatility of US output fluctuations has both a long run pattern, characterized by a structural break in 1984, as well as business cycle dynamics, in which periods of high uncertainty are associated with NBER recessions.
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- 1.
Some of the pioneer works are McConnell and Perez-Quiros (2000), Kim and Nelson (1999), Blanchard and Simon (2001), and Chauvet and Potter (2001), among others. McConnell and Perez-Quiros (2000) find a structural break in the volatility of US GDP growth and all its major components in the first quarter of 1984. Kim and Nelson (1999) find additionally that there had been a narrowing gap between growth rates during recessions and expansions. Blanchard and Simon (2001) and Chauvet and Popli (2003, 2013) find that output stabilization was a secular feature that was also observed in several other industrialized countries. Chauvet and Potter (2001) and Sensier and Dijk (2004) show that the reduction in volatility of US GDP is not specific to aggregate output, but it is shared by several other aggregate series.
- 2.
Interestingly, this the last year of the sample used in Hamilton (1989) to estimate the business cycle Markov switching model.
- 3.
The sample used in the study is from 1953:Q2 and 1999:Q2.
- 4.
The sample studied is from 1947Q2 to 2006Q4, thus excluding the Great Recession, which was one of the longest in the post-War period.
- 5.
For more details on the model and estimation see Chib (1998).
- 6.
Kim and Nelson (1999) use output growth demeaned for the subsamples before and after 1973.
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Chauvet, M., Su, Y. (2014). Nonstationarities and Markov Switching Models. In: Ma, J., Wohar, M. (eds) Recent Advances in Estimating Nonlinear Models. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-8060-0_7
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DOI: https://doi.org/10.1007/978-1-4614-8060-0_7
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