Non-Markovian Regime Switching with Endogenous States and Time-Varying State Strengths

FRB of St. Louis Working Paper No. 2004-030A

31 Pages Posted: 29 Jul 2005

See all articles by Siddhartha Chib

Siddhartha Chib

Washington University in St. Louis - John M. Olin Business School

Michael Dueker

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Date Written: November 2004

Abstract

This article presents a non-Markovian regime switching model in which the regime states depend on the sign of an autoregressive latent variable. The magnitude of the latent variable indexes the `strength' of the state or how deeply the system is embedded in the current regime. In this model, regimes have dynamics, not only persistence, so that one regime can gradually give way to another. In this framework, it is natural to allow the autoregressive latent variable to be endogenous so that regimes are determined jointly with the observed data. We apply the model to GDP growth, as in Hamilton (1989), Albert and Chib (1993) and Filardo and Gordon (1998) to illustrate the relation of the regimes to NBER-dated recessions and the time-varying expected durations of regimes. The article makes use of the Metropolis-Hastings algorithm to make multi-move draws of the latent regime strength variable, where the extended Kalman filter provides a valid proposal density for the latent variable.

Keywords: Regime switching, Markov Chain Monte Carlo, nonlinear state space

JEL Classification: F42, C25, C22

Suggested Citation

Chib, Siddhartha and Dueker, Michael, Non-Markovian Regime Switching with Endogenous States and Time-Varying State Strengths (November 2004). FRB of St. Louis Working Paper No. 2004-030A, Available at SSRN: https://ssrn.com/abstract=761925 or http://dx.doi.org/10.2139/ssrn.761925

Siddhartha Chib (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
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314-935-4657 (Phone)
314-935-6359 (Fax)

Michael Dueker

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

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