Regime-Dependent Effects of Uncertainty Shocks. A Markov-Switching Approach for Central Eastern European Countries
Year: 2024 Volume: 74 Issue: 1 Pages: 105-140
Abstract: Over the past decades, the Central Eastern European (CEE) economies have experienced events characterized by a high degree of uncertainty that have had adverse and persistent effects at the macroeconomic level. This paper analyzes the asymmetric effects of uncertainty shocks (alternately defined by a financial stress index and implied volatility) in two distinct regimes. Structural sudden regime shifts from a high-volatility regime to a low-volatility one are modeled using Markov-switching vector autoregressive models with sign restrictions, given that the probability transition matrix is either time-invariant or time-variant. Our results on key macroeconomic monthly indicators (industrial production, inflation, interest rate) suggest that uncertainty shocks produce significant short-term effects on industrial production and inflation, slightly different in these two regimes, along with a persistent effect on the interest rate.
JEL classification: C11, C32, C51
Keywords: Markov-switching, uncertainty shocks, time-varying probability, high-low volatility regimes
DOI: https://doi.org/10.32065/CJEF.2024.01.04
RePEc: https://ideas.repec.org/a/fau/fauart/v74y2024i1p105-140.html
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