Modeling Intense Economic Growth Using the Threshold Error Correction Model: the Case of Israel

The presentation shows a comprehensive approach to threshold cointegration to analyze intense growth patterns. It is understood as a faster-than-expected growth rate preceded by an introduction of a set of necessary reforms. We extended the Enders and Siklos test to analyze short- and long-run dynamics, in which statistical properties are quite satisfactory. Nevertheless, we suggest applying a hierarchical procedure for the most robust TECM model construction. As an example, we analyze the Israeli per capita Gross Domestic Product (GDP) growth dynamics. The time series data for the years 1980–2019 are taken. The study uses a two-regime threshold error correction model (TECM) to test short- and long-term growth factors. The results reveal that Research and Development (R&D) expenses measured as a percentage of GDP are the primary driving force in the long and short term. The threshold value of 3.25% of GDP exhibits a substantial difference between the two regimes corresponding to the development phases of the Israeli economy. The results are validated using various tests for threshold models. It allows the formulation of policy recommendations.