Modeling the Effective Factors on Economic Growth in Iran: Markov Switching GARCH Approach

Economic growth is one of the most important macroeconomic indicators in each country that its sustainability for a long time is one of the most basic and necessary conditions to achieve economic development.  The aim of this paper is modeling the effective factors of economic growth in Iran concerning the period 1973-2014 using a Markov switching GARCH model (MS-GARCH). The contribution of this paper is considering two regimes for economic growth volatility and also the conditional mean of economic growth. The results indicate that economic growth has two regimes with high and low mean as well as two regimes with high and low volatility.  Also, the government size has a nonlinear impact with a specific level of threshold on economic growth; the estimated threshold value has been 22.5%.  Furthermore, the variables of openness, the capital formation growth, human capital, financial development index and the share of oil revenue in GDP have a significant positive impact on economic growth. Finally, the active population growth has a positive but insignificant effect on economic growth.