A three-regime business cycle model for an emerging economy

Abstract

A three-regime business cycle model is proposed based on Minsky financial instability hypothesis. Using this framework and a Markov switching autoregressive model Mexico's business cycle turning points are identified published by the Economic Cycle Research Institute (ECRI).

Acknowledgements

The author is grateful to Mexico's National Council for Science and Technology (CONACYT) for financial support.

Notes

There are few studies drawing inferences regarding the business cycles movements in emerging economies and they also assume two regimes (see, for example, Mejia-Reyes, 2000).

There is, however, a debate on how and which regime should be divided. For example, Öcal and Osborn (2000, p. 27) propose that the upswing should typically consist ‘of a period of rapid recovery followed by one of slower growth'. Meanwhile, Ferrara (2003, p. 375) suggests that ‘the contraction phase can be separated into a slowdown phase and a recession phase'.

The margin of safety represents a cushion which absorbs any unforeseen changes in the cash inflows and outflows of economic agents (units or firms) (Kregel, 2001, p. 196).