Colombian Economic Growth Under Markov Switching Regimes with Endogenous Transition Probabilities

Borradores de Economia, Forthcoming

23 Pages Posted: 28 Dec 2006

Date Written: December 2006

Abstract

In this paper, we modelled the Colombian long run per capita economic growth (1925-2005) using a Markov switching regime model with both fixed (FTP) and time-varying transition probabilities (TVTP) to explain regime changes in the economic growth. We found evidence of non-linearity in the per capita economic growth, and two different levels in the data associated with depression and sustainable growth regimes were identified. In addition, the hypothesis of fixed probabilities is rejected in favour of the time-varying transitional probabilities, meaning that the correct model is the one with endogenous probabilities, when the probability of remaining in the sustainable growth regime increases with a rise in terms of trade, government expenditures and decreases with capital outflows. On the other hand, increases in government expenditures and terms of trade decrease the probability of being in the depression state while an increase in capital outflows raises such probability. Finally, we found that TVTP model gives more information than FTP model because the probabilities have changed significantly during the period under analysis and the explanatory variables are very informative in dating the evolution of the state of the economy, especially those associated with external shocks.

Keywords: Markov endogenous switching regime model, Time-varying transition probabilities, economic growth, Colombia

JEL Classification: O40, C22, E32, N16

Suggested Citation

Misas Arango, Martha and Ramirez, Maria Teresa, Colombian Economic Growth Under Markov Switching Regimes with Endogenous Transition Probabilities (December 2006). Available at SSRN: https://ssrn.com/abstract=953954 or http://dx.doi.org/10.2139/ssrn.953954

Martha Misas Arango

Banco de la Republica ( email )

Carrera 7 #14-78
Bogota
Colombia

Maria Teresa Ramirez (Contact Author)

Central Bank of Colombia ( email )

Cr 7 No.14-78 Piso 11
Bogotá

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