Business cycle measurement in the presence of structural change: international evidence

By generalizing Hamilton's model of the US business cycle to a three-regime Markov-switching vector autoregressive model, this paper analyzes regime s hifts in the stochastic process of economic growth in the US, Japan and Eur ope over the last four decades. Empirical evidence is established for the p resence of a structural break in the expansionary GDP growth for the US and Japan based on an output-employment MS vector equilibrium correction model , and a structural break in the context of a common European business cycle . For the United States the long expansions of recent years signify basic c hanges in the business cycles pattern. In the case of Japan we identify lon g episodes of rapid economic expansions (existing until the mid 1970s) and long economic recessions (as in the 1990s). In Europe we find after an epis ode of catching-up in the 1970s, convergence in the business cycle pattern which suggests the notion of a European business cycle. The multi-regime Ma rkov-switching VARs proposed are profoundly checked for their economic cont ent and statistical congruency, and are found to provide a sound statistica l framework for a comprehensive analysis of the business cycle. (C) 2001 In ternational Institute of Forecasters. Published by Elsevier Science B.V.