We modelled the Colombian long-run per capita growth under Markov **switching** **regimes** with time-varying transition probabilities (TVTP) to explain regime changes in the economic growth. We found evidence of nonlinearity in the per capita economic growth, and identified two different levels in the data associated with depression and sustainable growth **regimes**. The hypothesis of fixed transition probabilities (FTP) is rejected in favour of the time-varying transition probabilities. Then, TVTP model gives more information than the FTP model because the probabilities have changed significantly during the period under analysis and the explanatory variables are very informative in dating the evolution of the state of the economy, especially those associated with external shocks. In particular, the probability of remaining in the sustainable growth regime increases with a rise in terms of trade and decreases with a rise in government expenditures. Increases in government expenditures and terms of trade reduce the probability of being in the depression state while an increase in capital outflows raises the probability.

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In the literature, little role is attributed to the country risk conditional volatility in the determination of the macroeconomic equilibrium in a developing small open economy (DSOE). This paper posits the prime hypothesis that, in the presence of multiple equilibria and self-fulfilling prophecies, one of the reasons why investors prefer to speculate in a determined country’s sovereign bonds, raising its country risk levels, is the switch of the expected macroeconomic fundamentals’ conditional variance towards a higher regime. Non- linear GARCH models are applied to monitor different **switching** **regimes** of the Brazilian country risk conditional volatility, with special emphasis on Markov **switching** **regimes**. Results indicate that the high volatility regime periods, better identified by the latter, coincide with all the severe liquidity crisis episodes suffered by Brazil from May 1994 through September 2002. Thus, although not free of limitations, the country risk’s high conditional volatility regime might determine a bad equilibrium and its monitoring might work as a practical tool to assess the duration of liquidity crises in a DSOE highly dependent on foreign capital inflows such as Brazil.

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Our results show that the introduction of the **regimes** in the credit spread dynamics (Model 2C) enhances the explanatory power of theoretical determinants. In particular, the total e¤ect of these determinants throughout the sample period is weakened in the single regime models (Model 1, Model 1E, Model 1A, and Model 1C), thus reducing their explanatory power in most cases. Notice that all these models do not include interaction e¤ects but may include a dummy variable to account for the states in the credit cycle (Model 1C) or the economic cycle (Model 1E and Model 1A). Therefore, the explanatory power of Model 2C is not driven by the addition of the prevailing cycle as an explanatory variable. We also …nd that by conditioning on the states of the economic cycle (Model 2E) we cannot signi…cantly improve the explanatory power of the single regime models. When we condition on the announcement period (Model 2A) we do better than Model 2E but not as good as Model 2C. It appears then that Model 2E does not capture the total e¤ect of the economic recession on credit spreads due to the late announcement and Model 2A does not capture the e¤ective period of recession. Table 6 reports the adjusted R-squared for the seven models considered here. Relative to Model 1, Model 2A and Model 2E, Model 2C has the highest adjusted R-squared. However, relative to Model 1, Model 1E, Model 1A, and Model 1C do not lead to a signi…cant improvement. More interestingly, Model 2C always has the minimum value of AIC along with the highest explanatory power, which reaches on average 60% across all ratings. Detailed results for each of these models are reported in Tables 7 to 10. As can be noted from these tables, the retained sets of explanatory variables in the seven models are di¤erent because the model selection is based on the lowest AIC, in all cases starting from the same initial variables with respect to the multicollinearity issues. Here, the Variance In‡ation Factor (VIF) should not exceed the critical level of 10 for the regression to be retained. 10

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The paper is organized as follows: in Section 2, we define the model along with related filtrations. We use the LLGMM method to estimate the historical parameters of the model illustrated by three case studies in Section 3. Section 4 highlights the effects of risk neutral semi Markov parameters on option prices and volatility surfaces via simulations based on the Carr and Madan method. We also show that we can use the Fourier time stepping method of R Jackson (2009) to price American options and exotic options. Both algorithms are shown to blend naturally in the semi Markovian regime model due to the piecewise constant assumption imposed on the conditional intensity matrix. Section 4 ends with calibrations of Heston model, Markov and semi Markov regime **switching** Black Scholes models to a couple of option data, and we compare the fit of all models through the residual mean square error risk function. Section 5 concludes our work with a summary and a few problems encountered along the way, which haven’t yet found a satisfying resolution.

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Differential equations are ubiquitous in economics. Economic **regimes**, where there is a **switching** between them, fit particularly well within the framework of differential equations with discontinuous right-hand side, where the discontinuity represents the **switching** condition. In this paper, we assume an exogenous **switching** condition. However, this can without loss of generality be generalized by modelling the explicit economic context. The novelty of the stability theory discussed in this paper is that it is independent of the explicit solution of the system. This is a major advantage of our theory. However, it requires defining a weight function W, which may not always be easy. In particular, the paper shows that a distance function between two adjacent trajectories contracts in forward time over both, smooth and nonsmooth parts of the periodic orbit, where the dynamical system is discontinuous. It also shows that for two adjacent initial points the ω-limit set of nonsmooth period orbits is the same. Stiefenhofer and Giesl provide an example of the theory discussed in this paper [10] and compare it to global stability theory [11]. Further research should investigate the full basin of attraction of this model. Such a result would allow economists to fully characterize the set of initial conditions of exponentially asymptotically stable periodic orbits and to hence perform effective policy analysis.

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Third, the set of fundamental variables is changed by omitting the second in- terest rate, thus converting the RID approach to the standard monetary model, and by adding a proxy for trade volume. Adding the relative percentage changes of im- ports and exports as a proxy for trade volume only slightly affects the values of the existing variables. However, imports as well as exports are significantly related to changes in the exchange rate for all rates and **regimes** other than regime 2 for the JPY/USD rate. Omitting the long-term interest rate does not substantially influence the coefficients of the remaining variables, but the fit of the model gets slightly worse. Fourth, we re-estimate the results shortening the sample period successively for two years each 1 . For regime 1 this does not affect the signs of the estimated coef- ficients, but their size differs over time. While the influence of the money supply and the output variable becomes larger when the sample is shortened, there are only mi- nor changes for the short-term interest rate. The long-term interest rate, which serves as our proxy for inflation expectations, finally becomes insignificant when the sample ends before 1990. For regime 2 the results are different: the coefficients for relative

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Hence, the observed interest rate is a weighted average of the central bank’s target interest rate and the observed interest rate from last period. The smaller U the faster i t approaches its target value i t . The error term u t summarizes the part of monetary policy left unexplained by the variables in the Taylor rule, i.e. mone- tary policy shocks. These shocks can be generated from external influences, mis- takes, or by systematic and loose reactions of the central bank to variables not included in the monetary policy rule. u t is assumed to be normally distributed with zero mean and a state-dependent variance. The variance depends on a dif- ferent state (S t V ) than the smoothing parameter and the coefficients in the target interest rate. If it would depend on the same state, then the **regimes** would only capture periods of high and low interest rate volatility, which is not the objec- tive of this analysis.

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violations, and abuse of state and media resources so skew the playing field that the regime cannot be labeled democratic. Such **regimes** are competitive, in that democratic institutions are not a façade: opposition forces can use legal channels to seriously contest for (and occasionally win) power; but they are authoritarian in that opposition forces are handicapped by a highly uneven -- and even dangerous -- playing field. Competition is thus real but unfair". Their definition of competitive authoritarian makes a significant distinction from the minimal definition of democracy offered by Doorenspleet and others. Many **regimes** in this category meet the procedural minimum definitions of democracy, yet do not constitute democracy by Levitsky & Way. This regime type will be found to bear significant consequences on the levels of organized crime in Figure 2 below.

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Financial markets are central to the transmission of uncertainty shocks. This paper documents a new aspect of the interaction between the two by showing that uncertainty shocks have radically di¤erent macroeconomic implications depending on the state …nan- cial markets are in when they occur. Using monthly US data, we estimate a nonlinear VAR where economic uncertainty is proxied by the (unobserved) volatility of the struc- tural shocks, and a regime change occurs whenever credit conditions cross a critical threshold. An exogenous increase in uncertainty has recessionary e¤ects in both good and bad credit **regimes**, but its impact on output is estimated to be …ve times larger when the economy is experiencing …nancial distress. Accounting for this nonlinearity, uncertainty accounts for about 1% of the peak fall in industrial production observed in the 2007–2009 recession.

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It is not only the city-states of Asia that have pursued methods of recruiting migrant domestic workers while denying them the rights of other employees. Canada operates the ‘live-in caregiver programme’ as a way of meeting demands for child and elder care from Canadian families. The programme allows workers into Canada for a period of up to four years with the condition that they have a contract for employment as a caregiver in a family and will live-in with that family. After two years workers are allowed to apply for an open visa and later for permanent residence - the Canadian equivalent to the US ‘green card’ (Citizenship and Immigration Canada 2010). The programme treats domestic workers differently from other migrant workers by considering them as temporary visitors for the first two years, rather than allowing them to become landed migrants on arrival (Pratt 1997, 1999). The additional stipulation that they live-in makes them vulnerable to abuse and overwork, and they are also exempt from many of the employment protections that cover other workers (Walia 2010). As Abigail Bakan and Daiva Stasiulis (1997: 7) put it: ‘Canada shares with more authoritarian **regimes** a glaring willingness and indeed determination to exploit female migrant domestic workers from developing countries whose limited wage earning options have made them particularly vulnerable to political and legal control.’

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particular, we find that the implications of OCA theory carry through in both groups of countries. By contrast, whereas financial integration tends to foster flexible **regimes** among industrialized countries –in line with the impossible trinity view–, it increases the propensity to peg among non-industrial countries –something that we attribute to the fact that integration in those countries is strongly correlated with foreign currency- denominated external liabilities and larger currency mismatches, as documented by Eichengreen et al (2003). We also find support for the political view, albeit in a qualified version: pegs are more likely if the country lacks a good institutional track record, but less likely if the government is too weak to sustain them. Specifically, we find the choice of a peg to be negatively correlated with institutional quality –a result consistent with the policy crutch view–, but positively correlated with political strength –hinting at a sustainability problem. Indeed, we find that, although non-peg countries are more likely to adopt de jure (but not a de facto) peg in an inflationary context, most of these inflation- induced de jure pegs are ultimately short lived, a result that is consistent with recent work by Klein and Schambaugh (2006).

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The regime-**switching** model allows estimating the average persistence of each regime and the probability of being in a particular regime. This information is a useful tool for investment decisions, as well as for hedging purposes regarding the volatility of a certain asset. The empirical results show that the model is able to characterize the volatility **regimes** corresponding to the VIX index quite accurately. Moreover, the estimated volatility corresponding to the VIX index is much higher in the high volatility regime. Dueker (1997) points out that the volatility of financial assets usually exhibits discrete shifts and mean reversion. This author applies a GARCH/Markov-**switching** framework, using daily percentage changes in the Standard and Poor’s 500 index, to characterize the evolution of the VIX index. The model presented in this article differs from the approach of Dueker (1997) in that I postulate a specification for the VIX index rather than for the returns of the stock market index.

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De studies die de relatie tussen staat en economie als verklaring voor het wel of niet ontstaan van revolutie aandragen (Radnitz 2010, 2012; Gould en Sickner 2008) brengen [r]

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: Under increasing financial integration, a fixed-rate regime (or lower exchange-rate flexibility) is preferred both because monetary autonomy is constrained and because the impact of[r]

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which case there is some uncertainty and definite transactions costs; (c) both countries’ exchange rates float but are managed with reference to the same anchor currency (SAMEMANREF = 1), in which case there is more uncertainty and probably higher transactions costs (from wider spreads); (d) cases where one country has a pegged and another a managed currency (without a specific reference currency) (PEGMAN = 1); and so on. The matrix in Table 3 is a simple way of identifying the different possible **regimes**; in each of the cells in the first three rows there are two **regimes** to cover when countries refer (more or less strictly) to the same currency (in the north-west corner of the cell) and when they refer to different currencies (in the south-east corner). Table 4 gives the full specification, together with the distribution of observations across **regimes**. The default exchange rate regime is where both countries have a freely floating currency.

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As China's economy moves toward an internationalized market-oriented one, its dual legal **regimes** will be merged into one based on an integrated market in the future. As the economic, legal and political reforms are going on, China is attempting to consolidate both its domestic and foreign investment laws to produce a coherent pattern of statutory regulation, such as contract, corporation, registration, taxation and arbitration. For example, in order to join the WTO, the income tax treatments for domestic and foreign invested enterprises are being unified to meet the requirement of national treatment; a comprehensive contract law is being drafted to replace different contract laws; foreign exchange control is being loosened greatly since 1994.

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The approach of Behavioral Law and Economics has applied those insights to legal issues. 14 The implications of Behavioral Law and Economics for the design of disclosure **regimes** and corporate governance mechanisms are straightforward: If information flows need to be evaluated by their addressee and, ultimately, shall lead to consequences in their response (decision), then cognitive biases which contradict classical assumptions of human behavior need to be taken into account, too. This is especially valid regarding substantial business and legal risks. With respect to the processing of information to main monitoring parties, evaluation and response to risk serves as good example. P AINTER [2003] argues that

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countries, of which 166 are sovereign states and 165 are UN member states. The index is based on 60 indicators grouped in five different categories or dimensions of regime ranging from democracy to authoritarianism. These five categories are: Electoral process and pluralism (EPP), Functioning of government (FOG), Political participation (PPN), Political culture (PCL) and Civil liberties (CVL). Subsequently, these five measures of different aspects of democracy are suitably weighted and aggregated to yield an overall index (OSC, or the Index of Democracy with the score value in the range of zero to ten). On the basis of the score value (OSC) the political systems of different countries may be classified into Full democracies (score value in 8-10 range), Flawed democracies (score value in 6 to below-8 range), Hybrid **regimes** (score value in 4 to below-6 range) and authoritarian **regimes** (score value below 4).

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This is an important point because it invites us to revisit the resources-conflict nexus. The initial view that has been made popular through the empirical results of Collier & Hoe ffl er (2004) is that the presence of a larger booty induces more conflict, a finding in line with the theoretical findings that larger stakes incen- tivize players to fight more fiercely over the prize (see Garfinkel and Skaperdas’ (2007) literature review). These empirical findings have been contested, how- ever, since natural resources have been shown to have a pacifying e ff ect through their positive e ff ect on a country’s state capacity (Fearon & Laitin, 2003; Besley & Persson, 2011). Using more contemporaneous econometric techniques, Tsui (2011) presents evidence that oil discoveries make countries more authoritarian, and Cotet & Tsui (2013) demonstrate that when country fixed e ff ects are included in cross-country analyses, oil discoveries increase military spendings - hence pos- sibly coercion - in non-democratic **regimes**, without however increasing the risk of civil war.

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Our paper contributes to four sets of literature. First, we add to the risk-based explanations of outsized carry returns which suggest that countries differing in their interest rates have asymmetric exposures to global shocks (e.g., Lustig et al. (2011), Lustig, Roussanov, and Verdelhan (2014), Menkhoff et al. (2012), Dobrynskaya (2014), Lettau, Maggiori, and Weber (2014), and Christiansen, Ranaldo, and Söderlind (2011)). Such explanations are based on empirical analysis of the post Bretton Woods era. The relationship between exchange rate **regimes** and carry trade returns is underexplored. Our paper extends the literature by conditioning the standard carry trade strategy on both floating and fixed **regimes** over almost a century.

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