Business Cycle Dynamics of Economic Growth in the OECD Countries: Evidence from Markov-Switching Model

Abstract

This study estimates the Markov-switching model and examines the Keynesian business cycle dynamics ofeconomic growth for a comprehensive set of eight OECD countries. The estimated duration of regime one is (i)shorter for Denmark, Sweden and Switzerland, (ii) moderate for France and (iii) longer for Belgium, Spain andthe U.S. The persistence of regime two is observed to be (i) shorter for Belgium, Canada, Spain, Sweden andthe U.S., (ii) moderate for Denmark and France, and (iii) longer for Switzerland. The stylized evidence for thepersistence of a given state has important implications for Keynesian policy activism and the formulation ofmacroeconomic stabilization policies. The monetary and fiscal policies are used to reduce the amplitudes andtime-durations of the economic growth cycles and, thus, stabilise the output around its long-run natural ratelevel and the inflation around its target level. The short-run downward rigidities in prices in the goods marketsand in nominal wages in the factor markets tend to impinge upon the clearance of markets and the accelerationof economic growth during recessions, thereby leading to the pathologically longer durations of lower regimes.While the longer durations of upper regimes support the sustainability of the expansionary economic policies,the adequate precautions need to be taken for the inflationary implications of these policies.