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Higher moments of MSVARs and the business cycle

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  • Alexander Karalis Isaac

    (Birkbeck, University of London
    University of Warwick)

Abstract

I derive the first four moments of the Markov-switching VAR and use the results to reconsider the conflict between the Great Moderation and Financial Crisis literatures. In contrast to the linear model, a three-regime Markov-switching model captures the skewness and kurtosis of US GDP growth 1954-2011. However, a specification with four regimes splits the sample in 1984, a result familiar from the Great Moderation literature. The higher moments of the MSVAR, not previously studied in the literature, reveal the Great Moderation to be a trade off between variance and kurtosis. U.S. GDP growth shifts from an almost Gaussian structure 1954-84 into a pattern with low variance, negative skewness and high kurtosis. The Markov-switching model which splits the sample accurately captures the new moment structure.

Suggested Citation

  • Alexander Karalis Isaac, 2014. "Higher moments of MSVARs and the business cycle," BCAM Working Papers 1405, Birkbeck Centre for Applied Macroeconomics.
    • Handle: RePEc:bbk:bbkcam:1405
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    References listed on IDEAS

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