Business cycle

The theory of business cycles has evolved over the past few decades. For the most part, current business cy- cle theorists agree that cycles result, not from a naturally recurring cycle in economic variables, but from unex- pected shocks to the economy. The appearance of a cycle comes from the tendency of economic variables to adjust to random shocks in a manner that results in a cyclical pattern. While economists may agree shocks are the main cause of cyclical behavior, they do not agree on which shocks will cause cyclical behavior in major macroeco- nomic variables. Nor do they agree on exactly how those shocks are transmitted throughout the economy. Real Business Cycle theorists believe that it is the deviation of productivity from its expected levels, also referred to as technological shocks, that leads to the cyclical adjustment pattern. However, that is not a universally accepted ex- planation. Even were it true, it leaves the reason for the productivity deviation unexplained. With the transmis- sion mechanism and the cyclical trigger(s) still unidenti- fied, there have been no studies that have broaden the theories to explain a differential impact on businesses by business size.

World War II.Yet the recent recession is not usually regarded as especially severe, judging by its length, the decline in overall output or even the size of the overall decline in payroll employment. So something does seem at least qualitatively different and not just in the recent experience.The 1990–91 recession shared many of the same features of manufacturing employment decline.What is different is the New Economy and in particular the dramatic growth of the high-tech sector. This has made the whole manufacturing sector, the center of business cycle activity in the past, more cyclical than it has ever been.While the frequency of U.S. recessions, and sometimes their length and severity, have declined, the manufacturing sector itself has become more cyclically sensitive than before 1990 and this has been reflected in longer swings in manufacturing employment. Chart 2 shows the growth rate of manufacturing capacity including and excluding the high-tech sector: computers, semiconductors and commu- nication equipment.The latter series begins in

In 1978 – 1991, in terms of relative standard deviation of output component, labor wedge was the second most important wedge affecting output. However, this wedge was highly negatively correlated with output. This implies that the labor wedge was damping instead of increasing amplitude of business cycle. Hence, it would be inappropriate to categorize it as business cycle fluctuation source. Investment wedge played only a moderate role in output fluctuations in the first sub sample period. Although it overtook labor wedge and became the second biggest factor of output fluctuations, its impact was still much smaller than that of efficiency wedge. As its cyclical behavior is considered (counter-cyclical before 1992 and pro-cyclical afterwards), we believe it was a source of output fluctuation after 1992 but not before. In both sub sample periods and the whole sample period, government wedge played only a minor role in generating output fluctuations, which ruled it out as an important business cycle fluctuation source.

We document two facts. First, during the Great Recession, consumers traded down in the quality of the goods and services they consumed. Second, the produc- tion of low-quality goods is less labor intensive than that of high-quality goods. When households traded down, labor demand fell, increasing the severity of the recession. We find that the trading-down phenomenon accounts for a substan- tial fraction of the fall in U.S. employment in the recent recession. We show that embedding quality choice in a business-cycle model improves the model’s amplification and comovement properties.

Quantitative Findings: The main quantitative result in the paper is that liquidity shocks on their own may not explain strong recessions. In particular, we argue that one needs to in nu additional frictions on the labor market that interact with liquidity shocks in order to explain sizeable recessions. Our calibration exercise is purposely designed in such a way that the effects of liquidity shocks have the strongest possible effects. Nevertheless, when we study the impulse response to an extreme event in which all assets become illiquid we find that the response of output is a drop in 0.7% relative to the average output. The response of output to liquidity shocks is weak because liquidity shocks resemble investment shocks. Investment shocks have weak effects in neoclassical environments because output is a function of the capital stock which, in turn, moves very little in comparison to investment. This is the reason why the bulk of business cycle studies focus on total factor productivity shocks. 4 Moreover, due to the non-linear nature of liquidity shocks, their effects on output are negligible if they are not close to a full market shutdown.

This study extends the business cycle accounting method a la Chari, Kehoe, and McGrattan (2007) to a two-country open economy framework for con- sidering the business cycle correlation patterns between Japan and the U.S. over the 1980-2008 period. In terms of accounting for ‡uctuations in output, e¢ ciency wedges are important in Japan, while labor and e¢ ciency wedges are important in the US. Furthermore, the increase in the cross-country cor- relation of the labor and e¢ ciency wedges is important in accounting for the recent increase in the cross-country output correlation. In addition, in- ternational price wedges are necessary to account for the low cross-country consumption correlation. The main role of investment wedges is to prevent resources from ‡owing into the relatively e¢ cient country. A successful model for business cycle correlations between Japan and the US must account for this fact.

The constitution of the European Monetary Union has brought back to light an issue, that has been discussed in a global context for a long time – the existence of common elements in national business cycles. 1 As, among others, Bayoumi and Eichengreen (1993) and Tavlas (1993) have noted, monetary integration in case of insufficient similarities between the participating countries may lead to high costs of the integration process due to improper coordination between national economic fluctuations and supranational monetary policy. Whether there exists what might be called a “European business cycle” therefore plays a crucial role for success or failure of the union. While there appears to be a consensus in the literature that the European economies indeed share some common elements in their aggregate cyclical behavior (see Artis et al., 1998, or Lumsdaine and Prasad, 2003), opinions diverge concerning the question whether or not this common com- ponent gained importance for the national economies. Most econometric studies however suggest increasing similarities between the national business cycles with on-going European integration. 2 Reasons for this phenomenon still remain unrevealed though.

We find that economic growth has a clear positive impact on the likelihood of entering employership from own-account work. In particular, we observe that the probability of hiring employees increases by about 32.6% when GDP growth rates increase by one percentage point (see Table 1, Model I). We also obtain a positive cyclical effect on transitions from own-account worker to employer when using the reported household’s general feeling about the present economic situation. Our results show that the predicted probability of switching from own-account self-employment to employer increases by 17.3% when this variable increases by one unit (on a discrete 1-2-3 scale) (see Table 1, Model II). Hence, the impact of the household’s general feeling about the present economic situation may be considered substantial. These results, which use both a micro level and a macro level indicator of the business cycle, support the importance of expansionary periods for recruiting personnel or, in other words, our results show that own-account workers are less likely to hire employees during recessions.

In recent decades in the US, slack on the product and labor markets has fluctuated a lot over the business cycle, while inflation has been very stable. Figure 1 displays two measures of slack on the product market (the rate of idle capacity and the rate of idle labor), one measures of slack on the product market (the rate of unemployment), and the core inflation rate. The measures of slack are very countercyclical, whereas core inflation is very stable around 2%. The Great Recession is a good example of this pattern: from the beginning of 2008 to the middle of 2009, the rate of idle labor increased from 19% to 33%, the rate of idle capacity from 24% to 40%, the rate of unemployment increased from 5% to 10%, while the core inflation rate only fell from 2.1% to 1.2%. 1 Of course a possible explanation for the stability of inflation is that monetary policy is able to maintain inflation constant. But this seems implausible for two reasons. First, the mandate of monetary policy is to stabilize both slack and inflation, so it is unlikely that monetary policy focuses only on stabilizing inflation. Second, there is good empirical evidence that in the short run monetary policy does not have much influence on inflation: most empirical studies find that monetary policy barely contributes to short-run price movements. 2

duration of contractions using the probability of remaining in expansion esti- mated from the gaussian random walk assumption with the full sample mean and the sub sample means respectively. This is then plugged into the forumule for the mean duration from the geometric distribution (20) The quantity d c is the sample mean duration of contractions. Similar notation is used for ex- pansions. It is evident from rows 6 to 8 of Table that the gaussian random walk assumption does a reasonable job of matching the mean durations of con- tractions. The same cannot be said for expansions where the gaussian random walk assumption results in estimates of contractions that are far too short in most cases. Using the sub period sample mean (row 10) actually makes the estimates of the mean duration of expansions worse in the 19001-1950 period as well the 1951-2001 sub period. This suggests two hypotheses. The ¯rst is that it may well have been changes in moments other than the sample mean that explain the di®erences between the business cycle properties of the three sub periods. The second hypothesis is that the distribution of shocks might be non normal. To investigate this latter possibility Figure plots the empirical distribution of ¢y t for the period 1861 to 2000/01. It is evident that large

unity at 0.18 beats the CD production function by a substantial log-likelihood of over 20. Assuming equal prior model probabilities, this implies that posterior model probabilities are 4.8517e+08:1 in favour of the CES. 47 The principal reason for this result is that move- ments of factor shares with the CES specification help substantially to fit the data. The marginal likelihood improvement is matched by the ability of the CES model to get closer to the data in terms of second moments, especially the volatilities of output, consumption and the real wage, and the autocorrelation functions for inflation and the nominal inter- est rate. We also showed that the CES specification, independently of the informational assumption made in the estimation, is able to reproduce, at least qualitatively, the over- shooting response of the labour share to productivity innovations. The main message then for DSGE models is that we should dismiss once and for all the use of CD for business cycle analysis.

as shown by Gadea et al. (2018). This methodology has several advantages over other tech- niques: it not only overcomes some difficulties that arise in capturing business cycles with short samples and heterogeneous data, but also allows us to date the turning points of the business cycle of the regions and cluster them according to their cyclical features. With this model-based clustering approach for multiple time series, we can jointly estimate all the parameters of the model, including the number and composition of groups of regions. One alternative would be to use a two-stage procedure, that is, to date regional business cycles and then, based on these results, to build clusters, with a subsequent loss of information.

Economic ‡uctuations across the industrialized world are typically characterized by asymme- tries in the shape of expansions and contractions in aggregate activity. A proli…c literature has extensively studied the statistical properties of this empirical regularity, reporting that the magnitude of contractions tends to be larger than that of expansions; see, among others, Neftci (1984), Hamilton (1989), Sichel (1993) and, more recently, Morley and Piger (2012) and Adrian et al. (2018). While these studies have generally indicated that business ‡uctuations are negatively skewed, the possibility that business cycle asymmetry has changed over time has been overlooked. Yet, the shape of the business cycle has evolved over the last three decades: For instance, since the mid-1980s the U.S. economy has displayed a marked decline in macro- economic volatility, a phenomenon known as the Great Moderation (Kim and Nelson, 1999; McConnell and Perez-Quiros, 2000). This paper documents that, over the same period, the skewness of the U.S. business cycle has become increasingly negative. Our key contribution is to show that occasionally binding …nancial constraints, combined with a sustained increase in …nancial leverage, allow us to account for several facts associated with the evolution of business cycle asymmetry.

In an attempt to fill this gap, this paper performs a consistent comparison of several leading frictions in the literature that can generate PTM. To this end, as a point of our departure, we consider the same particular frictionless business cycle model that is relevant from an applied perspective, and embed all the frictions into this common framework. We then focus on the following three key features which, in our view, are likely to determine the broad-based applicability of these frictions to policy-oriented business-cycle work: (i) dependence of the mechanism generating PTM on a particular source of economic fluctuations in the model, (ii) neutrality of the mechanism generating PTM for the dynamic behavior of quantities, and finally, (iii) the degree of deviations from the law of one price generated by the friction.

Considering the higher moments of GDP growth closes the gap between the Great Moderation and Financial Crisis literatures, but the estimations presented only scratch the surface. A priority for future work is to find a specification which can make plausible conditional forecasts over the medium term, while also matching th higher moments well. The results for GDP growth suggest that the non- Gaussian behaviour of the modern business cycle is important, and that Markov-switching models provide a simple way of modelling this. The derivation of the higher moments could be applied to the generation of Markov-switching DSGE models now being developed, giving these researchers the ability to exploit non-Gaussian features of the data in designing and choosing between models.

The empirical results of this paper are a set of benchmark statistics for evaluating the performance of business cycle models for the Iranian economy. In an oil exporting country such as Iran, oil price shocks influence fiscal and monetary policies. Therefore, this paper attempts to point out the cyclical co-movement of oil prices with macroeconomic variables. In addition, vector error correction (VAR) and co-integration approaches are used to study the role of monetary policy shocks on the macroeconomic fluctuations.

In this paper, we evaluate the effectiveness of the “end of double taxation” policy as a tool for stimulating economic recoveries. Specifically, we study a real business cycle model in which firms are subject to the double taxation system similar to the one we just described. In period one, a negative and persistent shock “drags” the economy into a temporary recession. Then, in an attempt to end the recession, the government eliminates the double taxation on capital income. We evaluate the impact of this policy by analyzing the transitional dynamics of the aggregate variables towards the steady states. We consider both a “temporary policy” that eliminates dividend taxes for only 3 years and a “permanent policy” that eliminates dividend taxes forever. We also compare the effectiveness of this policy with two alternative policies that reduce labor income and business income taxes. A policy is desirable if it leads to a fast

where we use the same notation than in the main paper to denote the transaction costs for housing, etc. The function I f b > 0 g is equal to 1 if b > 0, i.e. if the household is a net debtor at the beginning of the period. We denote with r t p the interest rate premium charged to borrowers. The depreciation rate for housing H;t changes over the business cycle, being higher in the worst

untrimmed counterparts, we can conclude that segmentation plays a role. The results will not, however, indicate the precise importance of this role as they are simply a composition effect for sectors at a very high level of aggregation. Within the sectors are subsectors and industries with their own employment compositions and business cycle patterns, and the causal impacts of industry or sectoral shocks most certainly cross industry and sector boundaries.

First, our work contributes to the discussion on whether government spending, and discretionary spending in particular, stabilizes or destabilizes output. Fatás and Mihov (2003) provide empirical evidence that governments that intensively rely on discretionary spending induce significant macroeconomic volatility which lowers economic growth. The authors emphasize the importance of political factors in the fiscal policy conduct: insti- tutional arrangements that constrain discretion allow to reduce macroeconomic volatility. Andrés, Doménech, and Fatás (2008) analyze how alternative models of the business cycle can replicate the fact that large governments are associated with less volatile economies (as shown, among others, by Fatás and Mihov, 2001). The authors conclude that adding nominal rigidities and costs of capital adjustment to an otherwise standard RBC model can generate a negative correlation between government size and the volatility of output. It this study we are able to generate a negative correlation between a fraction of discretionary spending in total public spending and the volatility of output, given the government size.