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The Role of Economic Policy Uncertainty in Predicting U.S. Recessions: A Mixed-Frequency Markov-Switching Vector Autoregressive Approach

Author

Listed:
  • Mehmet Balcilar

    (Department of Economics, Eastern Mediterranean University, Turkey; Department of Economics, University of Pretoria, South Africa)

  • Rangan Gupta

    (Department of Economics, University of Pretoria)

  • Mawuli Segnon

    (Department of Economics, University of Kiel, Germany)

Abstract
This paper analyzes the performance of the monthly economic policy uncertainty (EPU) index in predicting recessionary regimes of the (quarterly) U.S. GDP. In this regard, we apply a mixed-frequency Markov-switching vector autoregressive (MF-MSVAR) model, and compare its in-sample and out-of-sample forecasting performances to those of a Markov-switching vector autoregressive model (MS-VAR, where the EPU is averaged over the months to produce quarterly values) and a Markov-switching autoregressive (MS-AR) model. Our results show that the MF-MS-VAR fits the different recession regimes, and provides out-of-sample forecasts of recession probabilities which are more accurate than those derived from the MS-VAR and MS-AR models. Our results highlight the importance of using high-frequency values of the EPU, and not averaging them to obtain quarterly values, when forecasting recessionary regimes for the U.S. economy.

Suggested Citation

  • Mehmet Balcilar & Rangan Gupta & Mawuli Segnon, 2015. "The Role of Economic Policy Uncertainty in Predicting U.S. Recessions: A Mixed-Frequency Markov-Switching Vector Autoregressive Approach," Working Papers 201558, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201558
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    as
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    More about this item

    Keywords

    Business cycles; Economic policy uncertainty; Mixed frequency; Markovswitching VAR models;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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