theory of business cycles

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Finance in the Theory of Business Cycles

Finance in the Theory of Business Cycles

Fluctuations in aggregate economic activity have accompanied market economies throughout history. The recessions have been severely disruptive in many cases causing widespread unemployment, and have slowed down the long run capital accumulation process by hurting demand conditions, and the profitability expectations of the firms. Neither the labourer, not the owner of capital likes recessions though they do not mind boom conditions. But overall they are better served with a steady growth path of the economy with less uncertainty and fear afflicting them in the short run. The birth and continuation of stabilization policy has to be understood in this context. It must be admitted however, that the warranted stabilization policy prescribed under different circumstances and in different times and places have covered a wide-ranging proposals generating a lack of consensus on the theory of such policy. The debate that took off since the publication of General Theory in 1936, has never really cooled down though the mainstream literature today is dominated by the models which are the descendants of new classical macroeconomics. Lucas has observed (1987) that costs of business cycles were insignificant with a hands off approach taken by macro-policy makers and stability in the monetary aggregates. This has not only stimulated further theoretical and empirical studies to prove or disprove him, but also challenged new-Keynesian theorists to provide robust micro-foundations for a structure that can generate their essential propositions.

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Schumpeter, Business Cycles and Co Evolution

Schumpeter, Business Cycles and Co Evolution

ABSTRACT In Business Cycles (1939) Schumpeter took up empirical data which had been produced by Kondratieff, and made the ‘‘clustering’’ of innovations into the actual cause of long economic cycles. The book was a failure, largely due to negative reviews which stressed the poor quality of its statistical analysis. In fact, an even more serious fault in it is its reflection of a near-total blind spot in Schumpeter’s perspective about the part played by law in economic life. He thought that ‘‘It is entirely immaterial whether or not [changes in the institutional framework] are embodied in, or recognized by, legislation.’’ The reality is that the concept of co- evolution of technology and ways of doing business, on the one hand, and legal changes which affect the conditions for investment in them, on the other, explain long cycles much more persuasively than Schumpeter’s approach. It suggests that the first Kondratieff cycle was made possible by the availability of ‘‘full’’ property rights, the second by general limited liability law (which Schumpeter thought was ‘‘of comparatively small importance’’) and the third by new patent legislation which made corporate investment in R&D attractive. Schumpeter only discussed three cycles, but a co-evolutionary perspective makes it possible to envisage a fourth cycle as dependent upon the trademark laws which sustain advertising and mass markets, and a fifth one, in which the entertainment and information industries have been similarly underwritten by copyright law. The most plausible reason why Schumpeter undervalued laws was his attraction to the economic interpretation of history. According to this, laws, like ideas, are no more than reflections on a psychic level of social and economic realities, and have little or no power to shape these. For Keynes, in contrast, ‘‘it is ideas, not vested interests, that are dangerous for good or ill’’. There was consequently no place for co-evolution in Schumpeter’s thought. But what made him publish a book which he described as ‘‘a house which is not finished and furnished’’, when he did? It could be that the stimulus was evidence of the huge fame which Keynes’s General Theory was already winning.

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The evolution of endogenous business cycles

The evolution of endogenous business cycles

The EBC2 model, like its first generation cousin, relies on the idea that DSGE models may have multiple indeterminate equilibria to explain real world phenomena. Unlike the EBC1 model, the EBC2 model displays steady- state indeterminacy. This is a significant departure from the earlier literature. Whereas the EBC1 model adds an additional shock, self-fulfilling beliefs, to a classical model; the EBC2 model provides a microfoundation for the Keynesian idea that there may be many equilibrium unemployment rates. This work recasts the central ideas from The General Theory (1936) in the language of dynamic stochastic general equilibrium theory. 6

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Dating the Serbian Business Cycles

Dating the Serbian Business Cycles

Two approaches are identified in the theory and practice of empiric research of business cycles: classical approach and approach of growth cycle. The classical approach to cycle analysis anticipates fluctuations in the absolute level of economic activity, while the approach of growth cycle anticipates the fluctuations in absolute level of economic activity level, as well as the fluctuations in relative level of economic activity. Cyclical analysis of economic activity by classical approach showed that in the observed period the expansion lasted as long as until March 2008, when the Serbian economy entered recession, which lasted as long as until July 2009. From July 2009 a phase of recovery has started but stopped by another recession in July 2011. The second wave of classical recession lasted until October 2012 when phase of recovery started once again. According to growth cycle approach two full business cycles could be identified in the Serbian economy: the first, from March 2002 to October 2003 and the second, from October 2003 to December 2009. Regarding growth cycle approach three full cycles are notable: the first, from June 2004 to April 2006, the second, from April 2006 to December 2009 and third from December 2009 to October 2012.

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Business Cycles, Political Incentives and the Macroeconomy: Comparison of Models

Business Cycles, Political Incentives and the Macroeconomy: Comparison of Models

Alesina and Roubini (1992) run regressions using a “permanent” partisan dummy and obtain results that indicate that a permanent difference in the inflation rate is linked to temporary deviations of output and unemployment from trend. Governments may end up in a sub-optimal equilibrium with an inflation bias if they are more concerned about growth and unemployment instead of inflation. This causes the inflation rate to remain high even after the economy has returned to its “natural” state. Carlsen (1997b) tests whether left-wing parties make more countercyclical fiscal policies, and uses panel data on 18 OECD countries between 1980 and 1992. His results support the partisan theory: the structural deficit is higher under left-wing governments while the unemployment is high. When the unemployment is low, the political orientation of the parties plays no role.

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Schumpeterian Foundations of Real Business Cycles

Schumpeterian Foundations of Real Business Cycles

There have been some preliminary attempts to test whether Schumpeterian growth may constitute a plausible source of economic fl uctuations, such as Phillips and Wrase (2006). In their study, the authors calibrate a simple model of vertical innovations and compare it against U.S. data. They conclude that the process alone, without other diffusion mecha- nisms such as labor-leisure choice or rigidities, is not appropriate to replicate the statistical properties found in the data. Notwithstanding, despite its novelty, the Phillips and Wrase (2006) model lacks one of the basic features of Schumpeter’s theory: the presence of a finan- cial sector. Financial frictions are an important source of business fl uctuations 3 and recently there has been a considerable amount of research devoted to explore the links between fi - nancial frictions and economic growth, such as Banerjee and Duflo (2005) or Buera and Shin (2008). The relationship between growth and finance has also been explored for Schum- peterian endogenous growth models, such as King and Levine (1993) or Aghion, Howitt and Mayer-Foulkes (2005).

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Business cycles and crime  the case of Argentina

Business cycles and crime the case of Argentina

Since the seminal work by Becker (1968) that provided the first economic theory of crime, many works have been devoted to the study of criminal behavior. According to Becker criminals are rational agents who maximize their utilities dividing their time between legal and illegal activities. This decision comes from a maximization problem in which agents compare expected costs and benefits of legal and illegal activities taking into accounts the probability of being arrested and punished.

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The sources of Iran's Business Cycles

The sources of Iran's Business Cycles

cycle. According to him, the main reason for the creation of these waves or production more or less than needed, is incorrect estimation of the profits by firms (optimism or pessimism) (Gordon,1974). In general theory, Keynes’ concern is to confirm that product equilibrium is less than full employment equilibrium and from his perspective the cause of business cycle are the changes in the marginal efficiency of capital. Overall, Keynes’ theories about business cycle can be classified under two categories: multiplier-accelerator theories (Hansen, 1964; Samuelson, 1939 and Metzler, 1941) and Keynesian endogenous theories (such as those proposed by Kalecki, 1935 and Goodwin, 1951) Keynesian endogenous cycle theories. Freidman believes that business cycles pay attention to the effect of lags and have a monetary root (Dore, 1993). Finally, another branch of the theories proposed by economists such as Frey (1987) and Tullock (1967) focus on the interdependence between economy and politics. Governments and ruling groups take measures to improve their popularity by decreasing inflation and unemployment temporarily. New classic theories in the framework of continuous market clearing, rational expectations, and vertical aggregate supply, present two theories: Lucas theory and the real business cycle theory. Lucas examines the role of imperfect information of economic agents in existence of a business cycle. Real business cycle theory, on the other hand, focuses on the role of real factors such as technology shock, oil supply disruption, change of tastes, etc. in development of business cycle (Walsh, 1986). New Keynesian theories of business cycle pay attention to the factors related to demand side by emphasizing the existence of imperfectly competitive market (Dore, 1993).

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Political ideology as a source of business cycles

Political ideology as a source of business cycles

I find that the group that has an advantage in the political dimension (i.e., its candidates are more ‘popular’) wins the elections more often and spends a lower share of output on public consumption, while investing a larger share than its counterpart. The political uncertainty is propagated into the economy and endogenous economic cycles are generated, even though there is no source of uncertainty other than the identity of the policymaker. This decreases welfare relative to the first best not only because it reinforces the dynamic inefficiency (investment is too low), but also because it introduces volatility in macroeconomic variables (output, employment, and consumption). Increases in the ideological bias widen the gap between the policies chosen by the the two groups, as well as their probabilities of being elected. The size of business cycles induced by changes in the bias is non-monotonic because it is affected by changes in policy and probabilities in opposite directions. As a result, economies where the political advantage is low exhibit rapid turnover but small fluctuations in policy as the gap in investment shares is small. At the other extreme, when the biases are large so are the differences in policy, but the most popular party is in power more often and hence fluctuations are small. Volatility is largest for intermediate values of the ideological bias. Using a proxy for investment shares and ideology biases for the US during the period 1929-2006, I show that these two variables tend to comove, providing some support for the theory.

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Economic Transactions Govern Business Cycles

Economic Transactions Govern Business Cycles

“ Serious efforts to explain business crises and depressions began amid the violent fluctuations in trade which followed the Napoleonic Wars ” (Mitchell, 1927). Not much changed since Mitchell statement nearly a century ago. For decades description of business cycles remains essential macroeconomic problem: Tinbergen (1935), Schumpeter (1939), Smithies (1957), Morgenstern, (1959), Lucas (1980), Kydland and Prescott (1982), Plosser, (1989), Zarnowitz (1992), Lucas (1995), Diebold and Rudebusch, 1999; Rebelo (2005), Kiyotaki (2011), Schmitt-Grohé and Uribe (2012), Diebold and Yilmaz, 2013; Jorda, Schularick and Taylor (2016), Huggett (2017), Bordalo, Gennaioli and Shleifer (2017). “ The incorporation of cyclical phenomena into the system of economic equilibrium with which they are in apparent contradiction remains the crucial problem of Trade Cycle Theory ” (Hayek, 1933, quoted by Lucas, 1976). “ Why aggregate variables undergo repeated fluctuations about trend, all of essentially the same character? Prior to Keynes ’ General Theory, the resolution of this question was regarded as one of the main outstanding challenges to economic research, and attempts to meet this challenge were called business cycle theory ” (Lucas, 1995).

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Economic Transactions Govern Business Cycles

Economic Transactions Govern Business Cycles

“ Serious efforts to explain business crises and depressions began amid the violent fluctuations in trade which followed the Napoleonic Wars ” (Mitchell, 1927). Not much changed since Mitchell statement nearly a century ago. For decades description of business cycles remains essential macroeconomic problem: Tinbergen (1935), Schumpeter (1939), Smithies (1957), Morgenstern, (1959), Lucas (1980), Kydland and Prescott (1982), Plosser, (1989), Zarnowitz (1992), Lucas (1995), Diebold and Rudebusch, 1999; Rebelo (2005), Kiyotaki (2011), Schmitt-Grohé and Uribe (2012), Diebold and Yilmaz, 2013; Jorda, Schularick and Taylor (2016), Huggett (2017), Bordalo, Gennaioli and Shleifer (2017). “ The incorporation of cyclical phenomena into the system of economic equilibrium with which they are in apparent contradiction remains the crucial problem of Trade Cycle Theory ” (Hayek, 1933, quoted by Lucas, 1976). “ Why aggregate variables undergo repeated fluctuations about trend, all of essentially the same character? Prior to Keynes ’ General Theory, the resolution of this question was regarded as one of the main outstanding challenges to economic research, and attempts to meet this challenge were called business cycle theory ” (Lucas, 1995).

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Essays on financial markets and business cycles

Essays on financial markets and business cycles

Finally, the chapter also relates to the debate on whether mon- etary policy should react to asset price “misalignments”. Bernanke and Gertler ( 2001 ) found in a financial frictions model with rational exogenous asset price bubbles that the answer is “no”. This view, al- though not unchallenged (Filardo, 2001 ; Cecchetti et al., 2002 ), forms the consensus opinion and indeed the practice of most central banks. It has also recently been reinforced by Gali ( 2014 ), who argues that since rational bubbles are predicted to grow at the rate of interest, the optimal policy to deflate a bubble might even be to lower interest rates when asset prices are rising too fast. Without incorporating bubbles, Faia and Monacelli ( 2007 ) find a similar result, and conclude that a strong exclusive anti-inflationary stance remains welfare-maximising. This chapter shows that such policy recommendations depend critic- ally on the underlying asset price theory. In a world of less than fully rational expectations, raising interest rates in an asset price boom can be effective in curbing exuberant investor expectations and mitigate

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Factor shares, business cycles and the distributive loop

Factor shares, business cycles and the distributive loop

Figure 7 resembles the phase diagrams that plot movements of employment and the wage share in Goodwin ’s growth cycle and related theories (Goodwin, 1967; Skott, 1989a). Goodwin makes a profit-squeeze argument defined in terms of rates of change: the change in the profit share is what varies counter-cyclically. This amounts to a weaker version of profit squeeze, inasmuch as the profit share moves procyclically as well as counter-cyclically and may be no higher on average during a recession than during a boom. If the profit squeeze refers to levels rather than rates of change, as in the present model, then a distributive loop can be generated only if the economy switches between profit squeeze and underconsumption at different stages of the business cycle. We therefore have two alternative ways of explaining a distributive loop, either by applying profit- squeeze arguments to changes in factor shares (Goodwin’s growth cycle) or by combining profit-squeeze arguments defined in terms of levels with underconsumption arguments (Sherman’s nutcracker theory). Both alternatives tone down the ‘pure’ profit -squeeze analysis.

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Randomness, Determinism and Undecidability in the Economic cycle Theory

Randomness, Determinism and Undecidability in the Economic cycle Theory

The scientific literature that studies the Business cycles contains a historical debate between random and deterministic models. On the one hand, models built with explanatory variables follow a stochastic trajectory and produce, through transmission mechanisms, the studied cycles. Its rationale: the so-called Slutsky-Yule effect. In addition, models in which the system phase at time T fixes, applying the “ceteris paribus condition”, the phase at time t + 1. The cycle would be the product of variables, making it possible to predict and enabling economic policies to combat recessions. The thesis of this work is as follows. The application of the theorems of Chaitin of undecidability shows that it is not possible to conclude such debate. It is impossible to determine with absolute certainty whether the observed cycles follow a deterministic or stochastic model. To reach this result, I outline the fundamental theories of the business cycle, providing a classification and examples of mathematical models. I review the definition of randomness, and I consider the demonstration of Chaitin about the impossibility of deciding whether a data set is stochastic or not. A consequence, he says, of Gödel incompleteness theorems. I conclude considering a string of economic data, aggregated or not, as random or deterministic, depends on the theory. This applies to all cyclical phenomena of any nature. Specific mathematical models have observable consequences. But probabilism and determinism are only heuristic programs that guide the knowledge progress.

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Business Cycles in Economics

Business Cycles in Economics

Xiong (2000), Kushner, Budhiraja (2000), Welch, Bishop (2001), Haykin (editor) (2001), Arulampalam, Maskell, Gordon, Clapp (2002), Doucet, Tadic (2003), Litvin, Konrad, Karl (2003), de Jong, Penzer (2004), Ristic, Arulampalam, Gordon (2004), van Willigenburg, De Koning (2004), Voss, Timmer, Kurths (2004), Cappé, Moulines (2005), Capp´e, Moulines, Ryd´en (2005), Poyiadjis, Doucet, Singh (2005a, b), Misra, Enge (2006), Frühwirth- Schnatter (2006), Gamerman, Lopes (2006), Rajamani (2007), Olsson, Cappé, Douc, Moulines (2008), Rajamani, Rawlings (2009), Francke, Koopman, de Vos (2010), Xia, Tong (2011), Matisko, Havlena (2012), Durbin, Koopman (2012), Ledenyov D O, Ledenyov V O (2013g). It may also be interesting to note that the Stratonovich – Kalman - Bucy filters with the embedded Stratonovich – Kalman - Bucy filtering algorithm within the Stratonovich optimal non-linear filtering theory in the finances were researched in Athans (1974), Fernandez (1981), Geweke, Singleton (1981), Litterman (1983), Meinhold, Singpurwalla (1983), Engle, Watson (1983), Harvey, Pierse (1984), Harvey (1989), Engle, Lilien, Watson (1985), de Jong (1991), Doran (1992), Tanizaki (1993), Bomhoff (1994), Venegas, de Alba, Ordorica (1995), Roncalli (1996), Roncalli, Weisang (2008), Wells (1996), Hodrick, Prescott (1997), Krelle (1997), Pitt, Shephard (1999), Cuche, Hess (2000), Durbin, Koopman (2000), Javaheri, Lautier, Galli (2002), Morley, Nelson, Zivot (2002), Bahmani, Brown (2004), Broto, Ruiz (2004), Fernàndez-Villaverde, Primiceri (2005), Fernàndez-Villaverde, Rubio- Ramirez (2005, 2007), Fernàndez-Villaverde (2010), Ozbek, Ozale (2005), Proietti (2006, 2008), Luati, Proietti (2010), Proietti, Luati (2012a, b), Ochoa (2006), Horváth (2006), Cardamone (2006), Pasricha (2006), Bignasca, Rossi (2007), Dramani, Laye (2007), Paschke, Prokopczuk (2007), Andreasen (2008), Osman, Louis, Balli (2008), Gonzalez-Astudillo (2009), Bationo, Hounkpodote (2009), Mapa, Sandoval, Yap (2009), Chang, Miller, Park (2009), Theoret, Racicot (2010), Winschel, Kratzig (2010), Lai, Te (2011), Jungbacker, Koopman, van der Wel (2011), Moghaddam, Haleh, Ebrahimijam (2011), Creal (2012), Darvas, Varga (2012), Hang Qian (2012), Ledenyov D O, Ledenyov V O (2013g).

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Measuring business cycles: a cross country analysis

Measuring business cycles: a cross country analysis

Economic expansion and slowdown are inherent in economic systems. Identifying mechanism through which prolong expansion and recession occurs is the focus of macroeconomic theory & policy. Business cycle is the fluctuation in economic activity that economy experience over a period of time. These fluctuations include output from all sectors including household, non-profits as well as business output. Classical economist had denied existence of business cycle. Sismondi was the first to discover the existence of cycle by examining an economic crisis that occurred during peace time. The very conceptual aspect of the business cycle can best be defined by the definition given by the Burns and Mitchell (1946) as follows-

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中国经济增长的政治周期假说:理论模型和实证检验

中国经济增长的政治周期假说:理论模型和实证检验

China is a socialist country whose political regime is quite different from others in western world , however, China ’ s business cycles are also coincidence with political cycles. This paper analyzed a hypothesis based on China ’ s real political and economic cycle. Firstly, we examined China ’ s election cycles and compared it with business cycles. Secondly, chose variables to formulate a short-run equilibrium model on consumer choice theory and game theory according to actual conditions, At last, through long-term and medium-term discussion, we concluded that in every political cycle, the curve of GDP growth is U shape, and fiscal revenue growth curve is over U shape.

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Monitoring Business Cycles with Structural Breaks

Monitoring Business Cycles with Structural Breaks

Although the in fl uence of the prior is very minor given the sample size, we give to the standard probit model 1 the advantage of a prior centered at its maximum likelihood estimator. For all models we assume that the prior variance of β is the identity matrix (β(τ ) for models 2 and 3) and the prior mean is the maximum likelihood estimate from the benchmark model 1, which assumes unit varince, no breaks, and no autoregressive component. This choice has no effect on the results (as we have almost 600 observations). In addition, it simpli fi es the calculation of the Bayes factors and is preferable to a prior that centered β at zero, which would imply no knowledge that we are using business cycle variables. It also implicitly favors the simplest model as its prior is aligned with the maximum likelihood estimates. With respect to the prior for τ , all possible datapoints could be used since we are assuming informative priors. However, we decided to keep a minimum of 10% of the data in each regime, eliminating a proportion of the endpoints. Notice that this sample still allows for the possibility of a break after the last business cycle trough of November 2001. It is important to note that by imposing a breakpoint in Model 2 we are effectively estimating it using two different samples. This provides a benchmark for the endogenous approach proposed. We could have made as the breakpoint the start of the 1980s expansion, but we decided to use the standard fi nding in the literature of a break in early 1984. Finally, the prior for the autoregressive parameter θ is assumed to be a

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Assessing European business cycles synchronization

Assessing European business cycles synchronization

Negative correlations on the first two graphs in Figure 5 tell us that the Bulgarian business cycle was initially, before 2004, most of the time in oppo- site phases to EU28 cycle. In addition, the largest correlation was on lag 1 which means that the Bulgarian cycle was following changes in EU28 cycle after one quarter. However, after 2004, when Bulgaria was in preparation to join EU in 2007, synchronization rapidly increased to reach almost the maxi- mum value until 2010, when two cycles were synchronized in the same quar- ter. Similarly to Germany and France sudden sharp drop in the level of syn- chronization occurred in 2011 with Bulgarian cycle. Luckily this drop didn’t last long and the synchronization returned to its previous level.

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International Business Cycles and Remittance Flows

International Business Cycles and Remittance Flows

Average remittance flows for the world are displayed in Figure 1. There is a trend of modest increase in average remittance inflows over the sample period with a sharp increase since 2001 followed by a dip in 2009. During other recessions, average remittance inflows either remained the same (1974 and 1982 recessions) or increased slightly than in previous periods. Average remittance inflows declined during the first Gulf war. This pattern suggests that remittance inflows are in general counter-cyclical to the US business cycle. We also observe a similar pattern for low and lower-medium income countries in Figure 2. However, the pattern reverses for high-income countries in Figure 3. The figure clearly shows that remittance inflows sharply declined during all recessions suggesting a strong pro-cyclical behavior. We observe the same pattern when upper-medium income countries are combined with high income countries (Figure 4).

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