Identifying Growth Accelerations
Introduction
Promoting sustained economic growth is a critical goal for economic policy. Traditional methods focus on long-term output trends to understand growth patterns, assuming a stable linear relationship between growth and its fundamentals. However, this assumption is often invalid due to the volatile nature of growth rates. Researchers have shifted towards investigating specific episodes of rapid and sustained growth, known as growth accelerations or growth spells.
Methodology
This paper proposes a new method to identify output growth accelerations by integrating elements of both "criteria-based" and "break-testing" approaches. Unlike traditional methods, the proposed criteria do not impose a fixed length on growth accelerations, allowing for detailed duration analyses without relying on questionable statistical techniques.
Key Findings
- Duration of Growth Accelerations: Growth accelerations typically last an average of 13.4 years, though there are significant variations across regions.
- Factors Influencing Accelerations: Initial conditions and contemporaneous domestic and external economic conditions play crucial roles in sustaining an acceleration. Changes in individual policy conditions have a relatively minor impact.
- Comparison with Previous Methods: While previous methods, such as those by Hausmann et al. (2005), have been widely adopted, they often assume a fixed duration of eight years. Structural break testing, used by Berg et al. (2012), suggests that country-specific growth characteristics should be considered.
Challenges and Limitations
- Low Power of Statistical Tests: The Bai–Perron test used in some methods may reject true breaks in GDP per capita series, leading to under- or over-identification of growth accelerations.
- Volatility and Periodic Averages: Criteria based on periodic averages risk identifying periods with sporadic high growth interspersed with low or negative growth, contradicting the aim of identifying sustained high output growth.
- Ad Hoc Criteria: Using ad hoc criteria may lead to errors in assessing growth performance due to variations in output growth volatility.
Additional Considerations
- Criteria-Based Approach: Hausmann et al. (2005) proposed criteria requiring average growth to exceed 3.5% per annum over eight years and surpass the preceding period by at least two percentage points. These criteria have been widely adopted.
- Break Testing: Berg et al. (2012) used structural break testing to identify the start of growth accelerations, suggesting that country-specific characteristics should be considered.
Conclusion
The new method offers a flexible approach to identifying growth accelerations, providing deeper insights into the causal mechanisms behind variations in growth performance. Future research could further refine these methods to better capture the nuances of economic growth dynamics.
