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Paper by Professor Carlos Bautista (College of Business Administration, University of the Philippines, Quezon City).
Business Cycles are non-linear. In Developed Markets analysis of business cycles using a binary distribution between expansion and recession phases does make sense. Economic growth rates are not that high anymore in mature, less volatile economies. Grouping into two states of nature does make sense in these cases.
However, emerging markets are far less volatile. Since they are less mature there is more potential for growth. But on the other hand: with their relatively fragile financial and often political systems, the possibility of a calamity is larger as well. Bautista uses a model that distinguishes between rapid growth, moderate growth and recession.
His analysis focuses on 5 emerging markets that were all - one way or another - victim of crises in the past. The 3-state model predicts quite nicely.
One of the interesting conclusions: regime switches do always move smoothly, i.e. there is no direct switch from rapid growth into recession or vice versa. The moderate growth state does therefore play a pivotal role.