The persistence of Taiwan's output fluctuations: an empirical study using innovation regime-switching model

Abstract

In this article we examine the persistence nature of Taiwan's aggregate output fluctuations by using the ‘innovation regime-switching’ (IRS) model in which the effect of an innovation may be permanent or transitory, depending on an unobservable state variable that follows a first order Markov chain. By applying the IRS model to Taiwan's real GDP data, we find that during the 1961 to 2000 period 61% (39%) of the real output shocks are likely to have permanent (transitory) effects. Moreover, the innovations in the officially identified expansion (contraction) are more likely to have a permanent (transitory) effect. These results are similar to those found in many studies of US real output fluctuations, e.g. Beaudry and Koop (1993), Kim and Nelson (1999) and Kuan et al. (2005). However, we also find that Taiwan's output dynamics have changed drastically ever since year 2000. In particular, the shocks to real GDP have become more likely to have only transitory effect, even during the period of post-2001:IV expansion.

Acknowledgements

We would like to thank the editor and one anonymous referee whose comments led to a much improved version of the article. The research support from the National Science Council of the Republic of China (NSC94-2415-H-007-004 for Y.-L. Huang) is gratefully acknowledged. All remaining errors are ours.

Notes

¹ Alesina et al. (1995), Alesina et al. (1999) and Drazen (2000) provided detailed discussions on possible effects of changes in government regimes and partisan politics on economic performance.

² Recently, Hansen (1992), Garcia (1998) and Carrasco et al. (2004) have proposed several solutions to test parameter stability in a Markov-switching model. However, their solutions cannot be directly applied to our problem because the primary concern here is to check whether p ₁₁ = 1, not parameter stability.

³ In Fig. 1, there are 86 quarters (about 55% of the sample) with the filtering probability being less than 0.5.

⁴ Note, however, that the Taiwan government decided to resume construction of the fourth nuclear power plant in 2001:I.