Sarafrazi, SoodabehHammoudeh, ShawkatBalcilar, Mehmet2016-06-062015-12Soodabeh Sarafrazi, Shawkat Hammoudeh & Mehmet Balcilar (2015) Interactions between real economic and financial sides of the US economy in a regime-switching environment, Applied Economics, 47:60, 6493-6518, DOI:10.1080/00036846.2015.1080806.0003-6846 (print)1466-4283 (online)10.1080/00036846.2015.1080806http://hdl.handle.net/2263/52877This objective of this study is to examine the linkages between real (economic) and financial variables in the United States in a regime-switching environment that accounts explicitly for high volatility in the stock market and high stress in financial markets. Since the linearity test shows that the linear model should be rejected, we employ the Markov-switching VECM to examine the same objective using the Bayesian Markov-chain Monte Carlo method. The regime-dependent impulse response function (RDIRF) highlights the increasing importance of the financial sector of the economy during stress periods. The responses and their fluctuations are significantly greater in the high-volatility regime than in the low-volatility regime.en© 2015 Taylor and Francis. This is an electronic version of an article published in Applied Economics, vol. 47, no. 60, pp. 6493-6518, 2015. doi : 10.1080/00036846.2015.1080806. Applied Economics is available online at : http://www.tandfonline.comloi/raec20.Real and financial sectorsBayesian MCMC methodRegime-dependent impulseRegime-dependent impulse response function (RDIRF)Markov-chain Monte Carlo (MCMC)Financial stress index (FSI)CBOE Volatility Index® (VIX®)Postprint Article