Regime-Dependent Impulse Response Functions in a Markov-Switching Vector Autoregression Model

Bank of Finland Discussion Paper No. 11/2001

27 Pages Posted: 23 Jul 2002

See all articles by Michael Ehrmann

Michael Ehrmann

European Central Bank (ECB); Bank of Canada

Martin Ellison

University of Oxford

Natacha Valla

European Union - European Investment Bank; European Central Bank (ECB); Banque de France

Date Written: March 8, 2001

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

Suggested Citation

Ehrmann, Michael and Ellison, Martin and Valla, Natacha, Regime-Dependent Impulse Response Functions in a Markov-Switching Vector Autoregression Model (March 8, 2001). Bank of Finland Discussion Paper No. 11/2001, Available at SSRN: https://ssrn.com/abstract=317929 or http://dx.doi.org/10.2139/ssrn.317929

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