AN ECONOMETRIC CHARACTERIZATION OF BUSINESS-CYCLE DYNAMICS WITH FACTOR STRUCTURE AND REGIME SWITCHING

A dynamic factor model with regime switching is proposed as an empiric al characterization of business cycles. The approach integrates the id ea of co-movements among macroeconomic variables and asymmetries of bu siness cycle expansions and contractions. The first is captured with a n unobservable dynamic factor and the second by allowing the factor to switch regimes. The model is estimated by maximizing its likelihood f unction, and the empirical results indicate that the combination of th ese two features leads to a successful representation of the data rela tive to extant literature. This holds for within and out-of-sample, an d for both revised and real-time data.