A Markov switching regime model of the South African business cycle

Abstract

Linear models are incapable of capturing business cycle asymmetries. This has recently spurred interest in non-linear models such as the Markov switching regime (MS) technique of modelling business cycles. The MS model can distinguish business cycle recession and expansion phases, and is sufficiently flexible to allow different relationships to apply over these phases. In this study, the South African business cycle is modelled using a MS model. This technique can be used to simultaneously estimate the data generating process of real GDP growth and classify each observation into one of two regimes (i.e. low-growth and high-growth regimes).