The Dynamics of Stagnation

Abstract

This paper analyzes periods of economic stagnation in a panel of countries. We test whether stagnation can be predicted by institutional characteristics and political shocks, and compare the impacts of such variables with those of traditional macroeconomic variables. We examine the determinants of stagnation episodes using dynamic linear and non-linear models. In addition, we analyze whether the effects of the included variables on the onset of stagnation differ from the effects on the continuation of stagnation. We find that inflation, negative regime changes, real exchange rate undervaluation, financial openness, and trade openness have significant effects on both the onset and the continuation of stagnation. Only for trade openness there is robust evidence of a differential impact. Open economies have a significantly lower probability of falling into stagnation, but once in stagnation they do not recover faster.