An econometric characterization of business cycle dynamics with factor structure and regime switching

A dynamic factor model with regime switching is proposed as an empirical characterization of business cycles. The approach integrates the idea of co-movements among macroeconomic variables and asymmetries of business cycle expansions and contractions. The first is captured with an unobservable dynamic factor and the second by allowing the factor to switch regimes. The model is estimated by maximizing its likelihood function, and the empirical results indicate that the combination of these two features leads to a successful representation of the data relative to extant literature. This holds for within and out-of-sample, and for both revised and real-time data.