Markov Switching Models for GDP Growth in a Small Open Economy: The New Zealand Experience

This paper fits Markov switching models to quarterly New Zealand aggregate GDP growth rates for the period 1978:1 to 2003:2 in order to analyse changes in mean and volatility over time. The models considered are drawn from a simple class of parsimonious, four state, Markov switching models which encompass a wide range of stationary time series behaviour from linear AR(1) models to non-linear models with persistent cycles and outliers. An overall objective is to use the models to help understand and identify changes in the historical growth performance of New Zealand's small open economy, particularly pre and post wide ranging economic reforms. Conclusions to emerge are that, in contrast to the 1980s, New Zealand GDP growth experienced an unusually long period of time in high growth and low volatility regimes since the early 1990s. In addition, New Zealand does not appear to have ...