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Characterising the South African Business Cycle: Is GDP Difference-Stationary or Trend-Stationary in a Markov-Switching Setup?

Author

Listed:
  • Mehmet Balcilar

    (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus , via Mersin 10, Turkey; Department of Economics, University of Pretoria, Pretoria, 0002, South Africa.)

  • Rangan Gupta

    (Department of Economics, University of Pretoria)

  • Charl Jooste

    (Department of Economics, University of Pretoria)

  • Omid Ranjbar

    (Ministry of Industry, Mine and Trade, Tehran, Iran)

Abstract

We test for a unit root in de-trended GDP in a two-state Markov switching specification using a modified Augmented Dickey-Fuller test. Our results show that a first difference GDP specification is preferred over the de-trended specification. In addition, the null of difference-stationary GDP cannot be rejected. By implication, shocks to GDP are permanent which validates specifying trend GDP with a stochastic component -something that is inherently assumed in a number of research papers that estimate potential GDP growth and that model GDP in general equilibrium specifications.

Suggested Citation

  • Mehmet Balcilar & Rangan Gupta & Charl Jooste & Omid Ranjbar, 2015. "Characterising the South African Business Cycle: Is GDP Difference-Stationary or Trend-Stationary in a Markov-Switching Setup?," Working Papers 201529, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201529
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    Cited by:

    1. Tolga Omay & Rangan Gupta & Giovanni Bonaccolto, 2017. "The US real GNP is trend-stationary after all," Applied Economics Letters, Taylor & Francis Journals, vol. 24(8), pages 510-514, May.

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    More about this item

    Keywords

    Markov-switching; difference-stationary; trend-stationary;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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