The performance of the Markov-switching model on business cycle identification revisited

This study examines the performance of Markov-switching model on business cycle by applying the model to various economies. Specifically, three comparison groups are used: (1) the USA and Japan serving as the representatives for the industrialized economies (or IEs hereafter); (2) Taiwan and South Korea serving as the representatives for newly industrialized economies (or NIEs hereafter); and (3) Malaysia and Indonesia serving as the representatives for the developing economies (or DEs hereafter). The empirical results are consistent with the following notions. First, the Markov-switching model serves well to depict the business cycles for IEs and DEs. Nevertheless, the model is ineffective for the two NIEs, which underwent structural economic shifts to slower growth during our sample period of 1970-1998. Second, the two-period Markov-switching by dividing the sample periods into two sub-periods thus more effectively measures the two NIEs' business cycles.