Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/129778
Authors: 
Balcilar, Mehmet
Gupta, Rangan
Segnon, Mawuli
Year of Publication: 
2016
Series/Report no.: 
Economics Discussion Papers 2016-14
Abstract: 
This paper analyzes the performance of the monthly economic policy uncertainty (EPU) index in predicting recessionary regimes of the (quarterly) U.S. GDP. In this regard, the authors apply a mixed-frequency Markov-switching vector autoregressive (MF-MSVAR) model, and compare its in-sample and out-of-sample forecasting performances to those of a Markov-switching vector autoregressive model (MS-VAR, where the EPU is averaged over the months to produce quarterly values) and a Markov-switching autoregressive (MS-AR) model. The results show that the MF-MS-VAR fits the different recession regimes, and provides out-of-sample forecasts of recession probabilities which are more accurate than those derived from the MS-VAR and MS-AR models. The results highlight the importance of using high-frequency values of the EPU, and not averaging them to obtain quarterly values, when forecasting recessionary regimes for the U.S. economy.
Subjects: 
business cycles
economic policy uncertainty
mixed frequency
Markov-switching VAR models
JEL: 
E32
E37
C32
Creative Commons License: 
http://creativecommons.org/licenses/by/3.0/
Document Type: 
Working Paper

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