Contagious Switching

36 Pages Posted: 15 May 2019

See all articles by Michael Owyang

Michael Owyang

Federal Reserve Bank of St. Louis - Research Division

Jeremy Piger

University of Oregon - Department of Economics

Daniel Soques

University of North Carolina (UNC) at Wilmington

Multiple version iconThere are 2 versions of this paper

Date Written: 2019-05-13

Abstract

In this paper, we analyze the propagation of recessions across countries. We construct a model with multiple qualitative state variables that evolve in a VAR setting. The VAR structure allows us to include country-level variables to determine whether policy also propagates across countries. We consider two different versions of the model. One version assumes the discrete state of the economy (expansion or recession) is observed. The other assumes that the state of the economy is unobserved and must be inferred from movements in economic growth. We apply the model to Canada, Mexico, and the U.S. to test if spillover effects were similar before and after NAFTA. We find that trade liberalization has increased the degree of business cycle propagation across the three countries.

Keywords: time varying transition probabilities, NAFTA, business cycle synchronization

JEL Classification: C32, E32

Suggested Citation

Owyang, Michael T. and Piger, Jeremy M. and Soques, Daniel, Contagious Switching (2019-05-13). FRB St. Louis Working Paper No. 2019-14, Available at SSRN: https://ssrn.com/abstract=3388108 or http://dx.doi.org/10.20955/wp.2019.014

Michael T. Owyang (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States

Jeremy M. Piger

University of Oregon - Department of Economics ( email )

Eugene, OR 97403
United States

Daniel Soques

University of North Carolina (UNC) at Wilmington ( email )

601 South College Road
Wilmington, NC 28403
United States

HOME PAGE: http://people.uncw.edu/soquesd/index.html

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