Beveridge-Nelson Decomposition with Markov Switching

In this paper, we consider the introduction of Markov-switching (MS) processes to both the permanent and transitory components of the Beveridge-Nelson (BN) decomposition. This new class of MS models within the context of BN decomposition provides an alternative framework in the study of business cycle asymmetry. Our approach incorporates Markov switching into a BN decomposition formulated in a single source of error state-space form, allowing regime switches in the long-run multiplier as well as in the short-run parameters.