European Business Schools Librarian's Group

Department of Economics Working Papers,
Vienna University of Economics and Business, Department of Economics

No 201: A Markov switching factor-augmented VAR model for analyzing US business cycles and monetary policy

Florian Huber () and Manfred M. Fischer ()
Additional contact information
Florian Huber: Oesterreichische Nationalbank
Manfred M. Fischer: Department of Socioeconomics, Vienna University of Economics and Business

Abstract: This paper develops a multivariate regime switching monetary policy model for the US economy. To exploit a large dataset we use a factor-augmented VAR with discrete regime shifts, capturing distinct business cycle phases. The transition probabilities are modelled as time-varying, depending on a broad set of indicators that influence business cycle movements. The model is used to investigate the relationship between business cycle phases and monetary policy. Our results indicate that the effects of monetary policy are stronger in recessions, whereas the responses are more muted in expansionary phases. Moreover, lagged prices serve as good predictors for business cycle transitions.

Keywords: Non-linear FAVAR, business cycles, monetary policy, structural model

JEL-codes: C30; E52; F41; E32 August 2015

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