MS-VAR Models Research Articles

Examining the Relationship Between Tourism Index Return and Financial, Macroeconomic and Tourism Industry Development Indicators: An Application of MS-VAR Models

Examining the Relationship Between Tourism Index Return and Financial, Macroeconomic and Tourism Industry Development Indicators: An Application of MS-VAR Models

Moments, shocks and spillovers in Markov-switching VAR models

To investigate how economies, financial markets or institutions can deal with stress, we often analyze the effects of shocks conditional on being in a recession or a bear market. MSVAR models are perfectly suited for such analyses because they combine gradual movements with sudden regime switches. In this paper, we develop a comprehensive methodology to conduct these analyses. We derive first and second moments conditional only on the regime distribution and propose impulse response functions for both moments. By formulating the MSVAR as an extended linear non-Gaussian VAR, all results are available in closed-form. We illustrate our methods with an application to stock and bond return predictability. We show how forecasts of means, volatilities and (auto-)correlations depend on the regimes. The effect of shocks becomes highly nonlinear, and they propagate via different channels. During bear markets, shocks have stronger effects on means and volatilities and die out more slowly.

How Population Aging Affects Industrial Structure Upgrading: Evidence from China

The question of how to proactively respond to population aging has become a major global issue. As a country with the largest elderly population in the world, China suffers a stronger shock from population aging, which makes it more urgent to transform its industrial and economic development model. Concretely, in the context of the new macroeconomic environment that has undergone profound changes, the shock of population aging makes the traditional industrial structure upgrading model (driven by large-scale factor inputs, imitation innovation and low-cost technological progress, and strong external demand) more unsustainable, and China has an urgent need to transform it to a more sustainable one. Only with an in-depth analysis of the influence mechanism of population aging on the upgrading of industrial structure can we better promote industrial structure upgrading under the impact of population aging. Therefore, six MSVAR models were constructed from each environmental perspective based on data from 1987 to 2021. The probabilities of regime transition figures show that the influencing mechanisms have a clear two-regime feature from any view; specifically, the omnidirectional environmental transition occurs in 2019. A further impulse-response analysis shows that, comparatively speaking, under the new environment regime the acceleration of population aging (1) aggravates the labor shortage, thus narrowing the industrial structure upgrading ranges; (2) has a negative, rather than positive, impact on the capital stock, but leads to a cumulative increase in industrial structure upgrading; (3) forces weaker technological progress, but further leads to a stronger impact on the industrial structure upgrading; (4) forces greater consumption upgrading, which further weakens industrial structure upgrading; (5) narrows rather than expands the upgrading of investment and industrial structures; and (6) narrows the upgrading of export and industrial structures. Therefore, we should collaboratively promote industrial structure upgrading from the supply side relying heavily on independent innovation and talent, and the demand side relying heavily on the upgrading of domestic consumption and exports.

Fiscal multipliers, public debt and economic cycle: SVAR and MS-VAR models for the Brazilian economy in the period 1997-2018

Resumo Este estudo avalia a capacidade da política fiscal em suavizar o ciclo econômico brasileiro. Para tanto, são estimados multiplicadores para variáveis fiscais desagregadas. Considerando os impactos positivos da política fiscal sobre a atividade econômica, as respostas do produto aos choques diferem entre as fases recessivas e expansivas do ciclo durante o período de 1997 a 2018. Em termos de condução de política econômica, os resultados revelam que os estímulos à demanda agregada são mais adequados em um contexto recessivo. Por fim, os autores mostram que a inclusão da dívida líquida nas equações do modelo não altera o comportamento dos choques no SVAR. Contudo, embora modifique alguns resultados do MS-VAR, não se trata de uma variável predominante para a magnitude do multiplicador fiscal, pois as flutuações cíclicas prevalecem sobre o tamanho do impulso fiscal.

Drivers of business cycles in Iran and some selected oil producing countries

Purpose - This study is aimed at analyzing the main drivers of business cycle in Iran and some selected oil producing countries during the 1970:Q1-2015:Q4 period. In addition, the study evaluates causality of leading macroeconomic indicators for each different regimes of the business cycles.Methods - This study proposes a new methodological approach by combining Markov-Switching Vector Autoregressive (MSVAR) and MS-Granger causality approach.Findings - The results show that there are diverse sources of business cycle. Iran experienced higher volatility of GDP where machinery investment and export are found as main driver of its business cycle. Meanwhile, consumer price index has countercyclical effect in all countries. We also find some similarities to the US, the UK, and Canada regarding the probability of a business cycle, number of observations, and the average duration, especially in the first regime of MS-VAR models. The high level of oil price volatility relative to the GDP volatility indicates the power of oil price shock to generate cycles. In addition, the results of the traditional Granger causality test confirm the Markov-Switching Granger Causality (MS-GC) test in all countries except export from the UK.Implication - Identification the main driver of business cycles is very significant to formulate the steady growth path so that the government able to select the most adequate economic policy.Originality - The novelty of this study is the adoption of a new approach by combining stylized facts and MS-VAR and MS-Granger causality to analyze the business cycles in different regime.

The Role of Economic Policy Uncertainty in Predicting U.S. Recessions: A Mixed-frequency Markov-switching Vector Autoregressive Approach

Abstract This paper analyzes the performance of the monthly economic policy uncertainty (EPU) index in predicting recessionary regimes of the (quarterly) U.S. GDP. In this regard, the authors apply a mixed-frequency Markov-switching vector autoregressive (MF-MS-VAR) model, and compare its in-sample and out-of-sample forecasting performances to those of a Markov-switching vector autoregressive model (MS-VAR, where the EPU is averaged over the months to produce quarterly values) and a Markov-switching autoregressive (MS-AR) model. Their results show that the MF-MS-VAR fits the different recession regimes, and provides out-of-sample forecasts of recession probabilities which are more accurate than those derived from the MS-VAR and MS-AR models. The results highlight the importance of using high-frequency values of the EPU, and not averaging them to obtain quarterly values, when forecasting recessionary regimes for the U.S. economy.

A Study on the Comovements and Structural Changes of Global Business Cycles using MS-VAR models

A Study on the Comovements and Structural Changes of Global Business Cycles using MS-VAR models

Estimation of Volatility in International Business Cycles in Korea and Selected Developed Countries under the Financial Crises

This study examined the structural changes in volatility in the international business cycles using the real GDP during financial crises within the 1971-2016 period. The coefficients did not appear to reflect unstable structural changes during a financial crisis as seen in Chow tests. On the other hand, the 1-Step tests showed stable and/or unstable coefficients except in Canada and Korea, but these were persistently stable in the N-Step tests except for Germany and Japan where such coefficients were unstable. In the CUSUM tests, the coefficients were stable over the periods. The CUSUMSQ tests showed stable coefficients in the country except Korea and UK. Korea exhibited higher regime switching volatility probability which suggests that significant changes in SWARCH model may have to be made. Transition probability showed the highest duration in the low regime in Canada. The MS-VAR models demonstrated significant simultaneous structural changes in volatility in international economic cycles as a result of the market crash. Korea was significantly affected and transmitted by the real GDP of the countries through the Asia and Global financial crisis. Therefore, we found structural changes in volatility in the international business cycles as a result of simultaneous symmetric or asymmetric shocks between Korea and major developed countries and we confirmed that the high volatility (contraction) regime coincided with the financial crises.

Granger Causality and Regime Inference in Markov Switching VAR Models with Bayesian Methods

Summary In this paper, we derive restrictions for Granger noncausality in MS-VAR models and show under what conditions a variable does not affect the forecast of the hidden Markov process. To assess the noncausality hypotheses, we apply Bayesian inference. The computational tools include a novel block Metropolis–Hastings sampling algorithm for the estimation of the underlying models. We analyze a system of monthly US data on money and income. The results of testing in MS-VARs contradict those obtained with linear VARs: the money aggregate M1 helps in forecasting industrial production and in predicting the next period's state. Copyright © 2016 John Wiley & Sons, Ltd.

New Monetarist Phillips Curve

Abstract This paper aims to analyse the cointegration and causality relationships between inflation, GDP and unemployment by using Markov Switching –VAR and Markov Switching Causality tests for the period from 1957(2) to 2014(3) in USA. This study complements previous empirical papers. But at the same time, it differs from the existing literature by using Markov Switching VAR and Markov Switching Causality method which determined there is long-run relationship between inflation and unemployment for USA. Different MS-VAR models were estimated and the best model was selected based on AIC and LR test. When the transition probabilities are taken into account, important asymmetries in inflation, GDP and unemployment were recognized. The changes in the behavior of the variables were detected with MS-VAR models. The results highlighted the importance of economy policy on economic growth.

The Credibility of Hong Kong's Currency Board System: Looking Through the Prism of MS-VAR Models with Time-Varying Transition Probabilities

The Credibility of Hong Kong's Currency Board System: Looking Through the Prism of MS-VAR Models with Time-Varying Transition Probabilities

Effects on Economic Growth of Prices of Gold and Oil: An Application by MS-VAR

Oil and gold are the two strategic commodities which have received much attention. The prices of oil and gold, which are the world’s most traded commodities, are very volatile. This paper aims to analyze the impact of oil shock and gold price on the business cycles of some developed countries: the United States, the United Kingdom, Germany, Canada, Australia and Italy. MS-VAR models have been extended to verify if the inclusion of oil prices, Gold Price as exogenous variables improves the ability of each specification and to identify the different phases of the business cycle for each country. MS-ARX and MS-VAR models were selected for capturing the 2 or 3 regimes for Austria, Canada, Germany, Italy, United Kingdom, France and USA. OP and AP variables were taken as exogenous for univariate MS(.)-ARX(.) models. When the transition probabilities are taken into account, important asymmetries in oil prices were recognized. There are two econometric results; the results for volatility of oil and gold price and the result for countries.The macro-economic policy studies had been made with MSIA(3)-VARX(4) models that AP and OP were taken as exogenous. The results highlighted the importance of energy policy on economic growth, economic development and welfare.

Economic Growth and Electricity Consumption in Africa: MS-VAR and MS-Granger Causality Analysis

Knowledge of the direction of the causality between electricity consumption and economic growth is of primary importance if appropriate energy policies and energy conservation measures are to be devised. This study estimates the causality relationship between electricity consumption and economic growth by Markov Switching Vector Auto Regression (VAR) and Markov Switching Granger Causality methods for some countries in Africa (7 Countries) and Asia(Brunei); Brunei, Cameron, Cote d'Ivoire, Nigeria, South Africa, Togo and Zimbabwe. The results from MS-VAR models show that in regime one, two and three, Electricity Consumption (EC) is the Granger cause of the Gross Domestic Product (GDP) and GDP is the Granger cause of the EC. In sum, we find some evidence of bidirectional GC between the EC and the GDP.