Markov-Switching Procedures for Dating the Euro-Zone Business Cycle

This paper addresses the issues of identification and dating of the Euro-zone business cycle by using the Markov-switching approach innovated by Hamilton in his analysis of the US business cycle. Regime shifts in the stochastic process of economic growth in the Euro-zone are identified by fitting Markov-switching models to aggregated and single-country Euro-zone real GDP growth data of the last two decades. The models are found to be statistically congruent and economically meaningful. Based of the smoothed regime probabilities from the Markov-switching models the Euro-zone business cycle is dated and recessions from 1980Q1 to 1981Q1 and 1992Q3 to 1993Q2 are revealed. A Markov-switching vector autoregression of real GDP growth rates in eight EMU member states shows that while the business cycles in the Euro-zone have not been perfectly synchronized over the last two decades, the overall evidence for the presence of a common Euro-zone cycle is strong.