Dependence structure between business cycles and CO2 emissions in the U.S.: Evidence from the time-varying Markov-Switching Copula models

Highlights: • We analyze the interdependence relations between CO₂ emissions and business cycles in the U.S. • We use the time-varying copula and the Markov switching models. • We find that the significant dependence structure between business cycles and CO₂ emissions. • We observe that the high dependence regime with the Gaussian copula is valid until 1982. • We find that the low dependence structure regime becomes prominent since the beginning of 1983. -- Abstract: The relationship between CO₂ emissions and economic growth is well-examined. However, there is a gap in the literature to examine the nexus by regime-switching models. For this purpose, this paper examines the interdependence relations between CO₂ emissions and the industrial production index as a measure of business cycles at the monthly frequency in the United States. We use a new approach to modeling dependence between the underlying variables over time, combining the time-varying copula and the Markov switching models. We find that there is a significant dependence structure between business cycles and CO₂ emissions, which has a regime-switching feature, for the period from January 1973 to January 2017. Specifically, during the recession episodes, we deduce that until 1982, the high dependence regime with the Gaussian copula is valid. Since the beginning of 1983, the low dependence structure regime becomes prominent.