Regime-Switching Models for Disaggregated Data (opens in new tab)

We show analytically and via simulation that cross-sectional aggregation can substantially attenuate regime-switching signals in time-series data, making regime switches harder to detect. Building on this, we develop regime-switching models and an estimation algorithm which allow for autoregressive dynamics and grouped heterogeneity. We apply the approach to a U.S. macroeconomic dataset of 94 series, covering components of real gross domestic pr...