A Duration-Dependent Regime Switching Model for an Open Emerging Economy 

by Ozun, Alper and Turk, Mehmet
Published in Romanian Journal of Economic Forecasting
, 2009, volume 12 issue 4, 66-81

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We employ duration-dependent Markov-switching vector auto-regression (DDMSVAR) methodology to construct an economic cycle model for an emerging economy. By modifying the software codes for DDMSVAR methodology written by Pelagatti (2003), we show how to estimate the economic cycles in an emerging economy where macroeconomic shocks are suddenly observed and their levels are deep. The monthly values of net international reserves, domestic debt, inflation and industrial production in the Turkish economy from January 1989 to July 2007 are used for constructing the empirical analysis. Empirical evidence shows that DDMSVAR model can be successfully used in an emerging economy to estimate the cycles using basic macroeconomic indicators.

Keywords: duration dependent regime switching model, economic cycles, Markov models, Turkish economy
JEL Classification:
E32, E37, O11, C53