Characterising the South African Business Cycle: Is GDP Difference-Stationary or Trend-Stationary in a Markov-Switching Setup?
Mehmet Balcilar (),
Rangan Gupta (),
Charl Jooste () and
Omid Ranjbar ()
No 201529, Working Papers from University of Pretoria, Department of Economics
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.
Keywords: Markov-switching; difference-stationary; trend-stationary (search for similar items in EconPapers)
JEL-codes: C22 C25 E32 (search for similar items in EconPapers)
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Working Paper: Characterising the South African Business Cycle: Is GDP Difference-Stationary or Trend-Stationary in a Markov-Switching Setup? (2015)
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