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Roman Liesenfeld
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Publisher: Journals Gateway
The Review of Economics and Statistics (2005) 87 (4): 697–708.
Published: 01 November 2005
Abstract
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We develop a model of GDP growth under which regime changes are triggered stochastically by an observable tension index , constructed as the geometric sum of deviations of actual GDP growth from a corresponding sustainable rate. Within expansionary regimes, the tension index tends to increase, which heightens the probability of a regime change. Given a regime change, the process becomes reversed, and the tension index begins to decline along a newly established path. Linking the behavior of the tension index to GDP growth enables us to capture floor and ceiling effects.