Explaining Structural Breaks in Growth Series

Abstract

Despite the fact that almost all work on economic growth has centered around long-run average growth rates, growth is not a steady process. It is common that countries switch between periods of fast growth and periods of slow (or no) growth. In this research project I examine the transition between periods of fast growth and slow (or no) growth. I explain a model that describes the mechanism behind these drops. Empirically there are two main conclusions. First of all the group of countries where I identified a downward break is distributed near the middle between the high income countries and the low income. I argue that this is relevant for test of the convergence hypothesis. Secondly under this model the probability of such a switch is positively correlated with importance of manufacturing and negatively correlated with skilled labor force and the development of financial markets.