Mixing Kohonen Algorithm, Markov Switching Model and Detection of Multiple Change-Points: An Application to Monetary History

TL;DR

This paper combines Kohonen's Self-Organizing Map, Markov Switching Models, and change-point detection to analyze historical monetary integration and identify regime shifts during the 19th century.

Contribution

It introduces a novel integrated approach combining SOM, Markov switching, and change-point detection for analyzing historical economic data.

Findings

Identified multiple change-points in monetary integration over 50 years.

Linked regime shifts to historical exogenous shocks.

Provided a detailed interpretation of regulation changes during the period.

Abstract

The present paper aims at locating the breakings of the integration process of an international system observed during about 50 years in the 19th century. A historical study could link them to special events, which operated as exogenous shocks on this process. The indicator of integration used is the spread between the highest and the lowest among the London, Hamburg and Paris gold-silver prices. Three algorithms are combined to study this integration: a periodization obtained with the SOM algorithm is confronted to the estimation of a two-regime Markov switching model, in order to give an interpretation of the changes of regime; in the same time change-points are identified over the whole period providing a more precise interpretation of the various types of regulation.