A Disaggregated Markov‐Switching Model of the Business Cycle in UK Manufacturing

Abstract

Exploring index of production data for six major UK manufacturing sectors, we investigate the interaction of the UK business cycle with changes in the industrial structure of the UK economy during the last three decades. We propose a Markov‐switching vector equilibrium correction model with three regimes representing recession, normal growth and high growth. The regime shifts simultaneously affect the common growth rate and the sectoral equilibrium allocation of industrial production. In contrast to previous investigations, a common cycle can be uncovered which is closely related to traditional datings of the UK business cycle.

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