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A TIME-VARYING MARKOV-SWITCHING MODEL FOR ECONOMIC GROWTH

Published online by Cambridge University Press:  10 November 2015

Bruno Morier  and
Vladimir Kühl Teles
Bruno Morier
Affiliation:
São Paulo School of Economics—FGV
Vladimir Kühl Teles*
Affiliation:
São Paulo School of Economics—FGV
*
Address correspondence to: Vladimir K. Teles, São Paulo School of Economics—FGV, Rua Itapeva 474, São Paulo, SP 01332-000, Brazil; e-mail: [email protected].
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Abstract

This paper investigates patterns of variation in economic growth across and within countries using a time-varying transition matrix Markov-switching approach. The model developed here explains the dynamics of growth based on a collection of different states that countries pass into and out of over time; in addition, these states are characterized by their own submodels and growth patterns. The transition matrix among the different states varies over time—depending on the conditioning variables of each country—with a linear dynamic for each state. We develop a generalization of Diebold's EM algorithm and estimate a sample model in a panel with a transition matrix conditioned on institutional quality and the investment level. We find three states of growth: stable growth, miraculous growth, and stagnation. The results show that institutional quality is an important determinant of long-term growth, whereas the investment level plays a variety of roles: it contributes positively in countries with high-quality institutions but is of little relevance in countries with medium- or low-quality institutions.

Keywords

Growth RegimesMarkov Switching
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 6 , September 2016 , pp. 1550 - 1580
Copyright
Copyright © Cambridge University Press 2015 

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