Abstract

A state-dependent dynamic system is one in which (1) the marginal effect of x on y at time t (forumla) depends on the prior value of the dependent variable forumla, and (2) the persistence of the dependent variable (forumla) depends on xt. We present a methodological strategy for dealing with state-dependent dynamic systems and demonstrate the consequences of ignoring state-dependence. As an applied example, we find evidence of state-dependence in the relationship between presidential approval and economic performance: high unemployment rates are most damaging to presidential approval among presidents with the highest initial approval ratings.

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