On growth and volatility regime switching models for New Zealand GDP data

This paper reviews and documents methodology for fitting hidden Markov switching models to New Zealand GDP data. A primary objective is to better understand the utility of these methods for modelling growth and volatility regimes present in the New Zealand data and their interaction. Properties of the models are developed together with a description of the estimation methods, including use of the EM algorithm. The models are fitted to New Zealand GDP and production sector growth rates to analyse changes in the mean and volatility of historical business cycles. The paper discusses applications of the methodology to dating business cycles, identifies changes in growth performances, and examines the timing of growth and volatility regime switching between GDP and its production sectors. Directions for further development are also discussed. JEL classification: C22 Time series models; E23 Production; E32 Business fluctuations, cycles; O47 Measurement of economic growth.