Using switching models to study business cycle asymmetries: 1. overview of methodology and application

Switching Models are advocated as interesting and tractable alternatives to conventional, linear models of the business cycle. Applications are motivated by the belief that expansions and recessions are distinct regimes with different data generating processes. Therefore, it is important that econometric specifications capture this fundamental asymmetry. With Switching Models, both the time-periods and characteristics of business cycle regimes can be derived simultaneously. Asymmetries can then be tested with a minimum of prior modeling assumptions and restrictions. Results with monthly data strongly support the asymmetric, multiple-regime view. These models have definite potential in many areas of economic research.