Impulse response function analysis for Markov switching var models

We exactly derive the regime-dependent impulse response functions for a Markov switching vector autoregres-sion (VAR) model in terms of neat matrix expressions in closed form. The key is to recognize that the latent first-order Markov switching process in the model has a VAR(1) representation, and that the model can be cast into a state-space form. Using such a representation, the regime-dependent impulse response function analysis can be processed with respect to either an asymmetric discrete shock or to a symmetric continuous shock. Our results extend and correct those obtained by Ehrmann et al. (2003) and coincide with those by Hamilton (1994) for the case of standard VAR models.

Automated summary

In this paper, we accurately derive the regime-dependent impulse response functions for a Markov switching VAR model using matrix expressions, and analyze them by transforming the model into a state-space form.