Modeling mechanism of economic growth using threshold autoregression models

Abstract

We propose to apply a time series-based nonlinear mechanism in the threshold autoregression form in order to examine the possible relationship between economic growth rate and its potential determinants included debt-to-GDP indicator. Our approach employs threshold variables instead of exogenous variables and time series data instead of panel data to reveal the economic instruments that have determined the business cycle in European countries for the last 2 decades—starting from 1995. The purpose of the study is to reveal the mechanism of growth (measured in terms of GDP growth rate and industrial production growth rate) given different macroeconomic indicators, such as public debt, rate of inflation, interest rate, and rate of unemployment with the level of growth itself serving as the threshold variables. We identify that the monetary mechanism played an important role in diagnosing the phases of business cycle in most European economies which is in line with liberal economic policy dominating in the observed period. The initial level of debt-to-GDP ratio as its increase within the recession period was of no value for the economic growth pattern.