Business cycle asymmetries: characterisation and testing based on Markov-switching autoregressions

Clements, M. P. ORCID: https://orcid.org/0000-0001-6329-1341 and Krolzig, H.-M. (2003) Business cycle asymmetries: characterisation and testing based on Markov-switching autoregressions. Journal of Business and Economic Statistics, 21 (1). pp. 196-211. ISSN 0735-0015 doi: 10.1198/073500102288618892

Abstract/Summary

Tests for business cycle asymmetries are developed for Markov-switching autoregressive models. The tests of deepness, steepness, and sharpness are Wald statistics, which have standard asymptotics. For the standard two-regime model of expansions and contractions, deepness is shown to imply sharpness (and vice versa), whereas the process is always nonsteep. Two and three-state models of U.S. GNP growth are used to illustrate the approach, along with models of U.S. investment and consumption growth. The robustness of the tests to model misspecification, and the effects of regime-dependent heteroscedasticity, are investigated.