Regional Business Cycles in Canada: A Regime-Switching VAR Approach

Abstract

This study uses a Markov-switching methodology to capture the asymmetric nature of provincial business cycles in Canada. The estimations identify two- and three-regime provincial business cycles as well as some provincial economies that do not experience explicit cycle phases. Despite the asychronicity of provincial business cycles, concordance indices identify a very close cyclical pattern between most provinces and Canada as the reference economy, and maximum correlation coefficients indicate that recessions in Ontario, which has a relatively large concentration of manufacturing, lead overall recessions in Canada and in some of the other provinces. The findings in this study suggests that indicators of the business cycle in the most representative region could be a useful policy tool for forecasting aggregate economic activity.