Research Discussion Papers, Bank of Finland
No 11/2001:
Regime-dependent impulse response functions in a Markov-switching vector autoregression model
Michael Ehrmann, Martin Ellison and Natacha Valla
Abstract: In this paper we introduce identifying restrictions into a
Markov-switching vector autoregression model. We define a separate set of
impulse responses for each Markov regime to show how fundamental
disturbances affect the variables in the model dependent on the regime. We
go to illustrate the use of these regime-dependent impulse response
functions in a model of the U.S. economy. The regimes we identify come
close to the “old” and “new economy” regimes found in recent research. We
provide evidence that oil price shocks are much less contractionary and
inflationary than they used to be. We show furthermore that the decoupling
of the US economic performance from oil price shocks cannot be explained by
“good luck” alone, but that structural changes within the US economy have
taken place.
Keywords: vector autoregression; regime switching; shocks; new economy; (follow links to similar papers)
27 pages, August 3, 2001
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