Can regime-switching models reproduce the business cycle features of US aggregate consumption, investment and output?

The ability of Markov-switching (MS) autoregressive models to replicate selected classical business cycle features found in US post-war consumption, investment and output is compared to that of linear models. Univariate MS models appear to offer more dynamically parsimonious representations, but generally are unable to reproduce features missed by linear models. In the multivariate models, some cointegration restrictions were found to have a crucial impact, and the ability of models that imposed cointegration to reproduce business cycle features was enhanced by Markov switching. Copyright (C) 2004 John Wiley Sons, Ltd.