Bangladesh Bank Training Academy Journal

Abstract

This paper examines the turning points of business cycle in Bangladesh using a Markov regime-switching approach to annual GDP of Bangladesh spanning 1974-2013. In particular, it applies the univariate Markov-switching model proposed by Hamilton (1989) which models GDP series with stochastic trend and a stationary cyclical component in order to identify turning points in business cycles observed in Bangladesh. Estimation shows that real GDP growth in Bangladesh follows a second order autoregressive process, AR(2) where mean GDP growth switches between high growth and low growth regimes. In addition, switching time coincides with the year 1991 when the financial sector reform program (FSRP) started after privatization and trade liberalization in the previous decade. The study also finds that both high and low growth regimes are significant and persistent implying that the high growth regime that began in 1991 is likely to continue in the subsequent years given the data generating process Identification of turning points in business cycles may be useful to economic agents and policymakers in decision making process.