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Multivariate Markov switiching common factor models for the UK

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posted on 30.01.2006, 18:03 authored by Terence Mills, Ping Wang
We estimate a model that incorporates two key features of business cycles, comovement among economic variables and switching between regimes of boom and slump, to quarterly U.K. data for the last four decades. A common factor, interpreted as a composite indicator of coincident variables, and estimates of turning points from one regime to the other, are extracted from the data by using the Kalman filter and maximum likelihood estimation. Both comovement and regime switching are found to be important features of the U.K. business cycle. The composite indicator produces a sensible representation of the cycle and the estimated turning points agree fairly well with independently determined chronologies. These estimates are sharper than those produced by a univariate Markov switching model of GDP alone. A fairly typical stylised fact of business cycles is confirmed by this model - recessions are steeper and shorter than recoveries.



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This is Business Cycle Volatility and Economic Growth Research Paper No. 01/1.