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Corresponding Author:
Mehmet Balcilar, Department of Economics, Eastern Mediterranean University, Fa-magusta, Turkish Republic of Northern Cyprus, via Mersin 10, Turkey

Coauthors:
Rangan Gupta, Department of Economics, University of Pretoria, Pretoria, South Africa
Charl Jooste, Department of Economics, University of Pretoria, Pretoria, South Africa
Omid Ranjbar, Ministry of Industry, Mine and Trade, Tehran, Iran

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

Volume 69 - Issue 1, February 2016
(pp. 33-44)
JEL classification: C22, C25, E32
Keywords: Markov-Switching, Difference-Stationary, Trend-Stationary

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 differencestationary 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.  


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Bibliography

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Institute for International Economics
of the Genoa Chamber of Commerce


Istituto di Economia Internazionale
Camera di Commercio di Genova
Via Garibaldi, 4 (III piano) - 16124 Genova (Italy)
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