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A time-varying markov-switching model for economic growth

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  • Morier, Bruno
  • Teles, Vladimir Kuhl

Abstract

This paper investigates economic growth’s pattern of variation across and within countries usinga Time-Varying Transition Matrix Markov-Switching Approach. The model developed follows theapproach of Pritchett (2003) and explains the dynamics of growth based on a collection of differentstates, each of which has a sub-model and a growth pattern, by which countries oscillate over time. Thetransition matrix among the different states varies over time, depending on the conditioning variablesof each country, with a linear dynamic for each state. We develop a generalization of the Diebold’sEM Algorithm and estimate an example model in a panel with a transition matrix conditioned onthe quality of the institutions and the level of investment. We found three states of growth: stablegrowth, miraculous growth, and stagnation. The results show that the quality of the institutions is animportant determinant of long-term growth, whereas the level of investment has varying roles in thatit contributes positively in countries with high-quality institutions but is of little relevance in countrieswith medium- or poor-quality institutions.

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File URL: http://bibliotecadigital.fgv.br/dspace/bitstream/10438/8797/1/TD%20305%20-%20Bruno%20Morier%20e%20Vladimir%20Kuhl%20Teles.pdf
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Bibliographic Info

Paper provided by Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil) in its series Textos para discussão with number 305.

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Date of creation: 30 Nov 2011
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Handle: RePEc:fgv:eesptd:305

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