Markov-Switching Models of Global and International Business Cycles

Abstract

Business cycle research focuses traditionally on (i.) the co-movement of macroeconomic time series and (ii.) the regime switching nature of macroeconomic activity. Recent theoretical and empirical research has revived interest in each issue separately as pointed out by Diebold & Rudebusch [1994]. A synthesis of the dynamic factor and the non-linear approach for the modelling of macroeconomic fluctuations associated with these different traditions in empirical macroeconomics is provided by the MS-VAR business cycle model, where the regime shift governing process generates dynamic factor structures. The purpose of this chapter therefore is not only to illustrate the MS-VAR model and the related methods developed in this study, but also to lend new insight into the common center of these two research strategies.