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The business cycle in a financially deregulated context: Theory and evidence


  • Moritz Cruz


This article proposes Minsky's financial instability hypothesis (FIH) as a theoretical underpinning for a three-regime business cycles model. Further, it is argued that the development of the FIH for open, developing economies (FIH-ODE) provides a better understanding of the performance of business cycles in these economies, particularly during the last two decades. In support of these claims, a three-regime autoregressive Markov switching model is estimated from 1980q1 to 2000q4 to Mexico's quarterly real GDP to investigate its business cycle behaviour. The estimated probabilities of the high and medium growth regimes suggest, for example, that after the financial liberalisation programme was fully launched, in the late 1980s, the economy shifted from the regime of medium to high growth (and vice versa) swiftly, reflecting its dependence on capital flows. Furthermore, the estimated parameters indicate that the average length of the business cycle has not changed.

Suggested Citation

  • Moritz Cruz, 2005. "The business cycle in a financially deregulated context: Theory and evidence," International Review of Applied Economics, Taylor & Francis Journals, vol. 19(3), pages 271-287.
  • Handle: RePEc:taf:irapec:v:19:y:2005:i:3:p:271-287
    DOI: 10.1080/02692170500119763

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    References listed on IDEAS

    1. Clements, M.P. & Krolzig, H.-M., 1997. "A Comparison of the Forecasting Performance of Markov-Switching and Threshold Autoregressive Models of US GNP," The Warwick Economics Research Paper Series (TWERPS) 489, University of Warwick, Department of Economics.
    2. Philip Arestis, 2002. "Financial crisis in Southeast Asia: dispelling illusion the Minskyan way," Cambridge Journal of Economics, Oxford University Press, vol. 26(2), pages 237-260, March.
    3. Sichel, Daniel E, 1994. "Inventories and the Three Phases of the Business Cycle," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 269-277, July.
    4. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
    5. Krozlig, H.M., 1997. "International Business Cycles: Regime Shifts in the Stochastic Process of Economic Growth," Economics Series Working Papers 99194, University of Oxford, Department of Economics.
    6. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
    7. Clements, Michael P & Krolzig, Hans-Martin, 2003. "Business Cycle Asymmetries: Characterization and Testing Based on Markov-Switching Autoregressions," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(1), pages 196-211, January.
    8. Ferrara, Laurent, 2003. "A three-regime real-time indicator for the US economy," Economics Letters, Elsevier, vol. 81(3), pages 373-378, December.
    9. Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262112388, January.
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    Cited by:

    1. Dapontas Dimitrios & Evangelopoulos Panagiotis, 2013. "Has the NAFTA Foundation Affected Business Cycles Length? An Introduction," Scientific Annals of Economics and Business, De Gruyter Open, vol. 60(1), pages 145-153, July.

    More about this item


    Autoregressive-Markov switching model; business cycles; Mexico; financial liberalisation; developing economies; JEL Classification: E12; E32; F41; F32;

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements


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