HOW DO FISCAL CONSOLIDATION AND FISCAL STIMULI IMPACT ON THE SYNCHRONIZATION OF BUSINESS CYCLES?

Using quarterly data for a panel of advanced economies, we show that synchronized fiscal consolidation (stimulus) programmes in different countries make their business cycles more closely linked. We also find: (i) some evidence of decoupling when an inflation targeting regime is unilaterally adopted; (ii) an increase in business cycle synchronization when countries fix their exchange rates and become members of a monetary union; (iii) a positive effect of bilateral trade on the synchronization of business cycles. Global factors, such as a rise in global risk aversion and uncertainty and a reversal of nonstandard expansionary monetary policy, can also reduce the degree of co‐movement of business cycles across countries. From a policy perspective, our work shows that an inflation targeting regime coupled with simultaneous fiscal consolidations can lead to more business cycle synchronization.     

Country Size and Economic Fluctuations

This paper investigates the character of business cycles across large and small economies. Empirically, G-7 countries have less volatile investment, consumption, and trade balance ratios, higher correlations between domestic sacing and investment rates, and about the same correlation of the trade-balance ratio and investment ratio as 68 smaller countries. These observations are consistent with a standard one-sector two-country general equilibrium model in which the only source of heterogeneity is country size. Since many developing countries are small, these findings suggest that even absent differences in markets and instutitions, economic fluctuations would be more severe in developing countries.     

How Large Is the Cost of Business Cycles in Developing Countries?

This study measures the cost of business cycles in developing countries. The business‐cycle component of consumption is extracted by employing a detrending filter adjusted for the length of a subject country's business cycles, rather than a standard detrending filter, and the cost of business cycles using the extracted component is extracted. Estimated costs in developing countries based on the adjusted filter are found to be significantly different from those based on the standard filter. Hence, in measuring the costs of business cycles in developing countries, we should be careful about the choice of a detrending filter. The results also indicate the following findings: 1) in developing countries, there is probably more room to improve the cost of non‐business‐cycle fluctuations than that of business‐cycle fluctuations, and 2) the cost of business cycles is not strikingly large, even when it is estimated from a model strongly disfavoring business cycles.     

Differentiating between business cycles and growth cycles: evidence from 15 developed countries

Growth cycles are often mistaken for business cycles, although these two have different statistical properties. In order to differentiate between them in a statistically satisfactory manner, the Bayesian information criterion-(BIC) based model-selection approach is presented. Business cycles are described by the cyclical trend model, and growth cycles are described by the trend-plus-cycle model. Whether the observed time series is derived from business cycles or from growth cycles is determined as a result of model selection. It is shown via data-based simulations that the proposed method works well in most situations. Empirical results obtained for 15 countries suggest that the business cycle model is selected for five countries, the growth cycle model is selected for two countries and the trend-plus-noise model is selected for eight countries.     

Portfolio choice of financial investors and European business cycle convergence: a panel analysis for EU countries

We investigate the linkage between business cycle convergence and financial portfolio choice for a panel of 18 EU countries. We construct an index of similarity of financial portfolios which we then put into context with the view that “the financial world” has an impact on business cycles and contributes to business cycle convergence via the consumption-wealth linkage. The model which guides our analysis is the International Asset Pricing Model (IAPM). Portfolios of the 18 EU countries investigated by us turn out to become more similar over time. According to our fixed effects GMM TSLS estimations, similar portfolios contribute to a convergence of business cycles—via a convergence of consumption cycles. This turns out to be especially true for country-pairs that include euro area non-member countries and, thus, have quite different income and wealth structures.     

BUSINESS CYCLES IN SMALL OPEN ECONOMIES: EVIDENCE FROM PANEL DATA BETWEEN 1900 AND 2013

Using a novel data set for 17 countries between 1900 and 2013, we characterize business cycles in both small developed and developing countries in a model with financial frictions and a common shock structure. We estimate the model jointly for these 17 countries using Bayesian methods. We find that financial frictions are an important feature for not only developing but also small developed countries. Furthermore, business cycles in both groups of countries are marked with trend productivity shocks. Common disturbances explain one third of the fluctuations in small open economies, especially during important worldwide phenomena.     

From the Global to the National Cycle: An Intricate Liaison

This paper examines the linkages between the global business cycle and national cycles. We first analyse the evolution of the global business cycle and present its main properties during global recessions and recoveries. We then consider how the sensitivity of national cycles to the global cycle varies over different phases of the global cycle and depends on country‐specific features. Our findings collectively portray an intricate liaison between the global business cycle and national cycles. National business cycles are tightly linked to the global cycle, but the sensitivity of national cycles to the global cycle is much higher during global recessions than expansions. There are significant differences across countries in how they respond to the global cycle as advanced economies appear to be more sensitive to global recessions than are developing economies. Moreover, countries tend to be more sensitive to the global cycle, the more integrated they are to the global economy.     

Some empirical tests on the integration of economic activity between the euro area and the accession countries

This note looks at the correlation of short‐term business cycles in the euro area and the EU accession countries. The issue is assessed with the help of vector autoregressive models. There are clear differences in the degree of correlation between accession countries. For Hungary and Slovenia, euro area shocks can explain a large share of variation in industrial production, while for some countries this influence is much smaller. For the latter countries, the results imply that joining the monetary union could entail reasonably large costs, unless their business cycles converge closer to the euro area cycle. Generally, for smaller countries the relative influence of the euro area business cycle is larger. Also, it is found that the most advanced accession countries are at least as integrated with the euro area business cycle as some small present member countries of the monetary union. JEL classification: E32, F15, F42.     

The Productivity Slowdown Puzzle. Technological and Non-technological Shocks in the Labor Market

Abstract

In this paper we examine the relationships between business cycles in the G7 countries. We focus on whether recessionary periods in one country are independent of the timing of recessions in other countries in the G7, using three different methods for dating recessions. We find that the evidence is mixed on whether phases of the business cycle in North America and in European countries are independent, or whether there is a common phase structure in the business cycle across all the G7 economies. NBER dates suggest that business cycles are synchronised, while other methods for generating business cycle chronologies are more consistent with regional, rather than international cycles. We also find mixed evidence on whether the UK is synchronised with European countries, while Japan quite clearly has the cycle that is most independent of other G7 countries.     

Dynamics of Business Cycles in Asia: Differences and Similarities

The paper documents the extent of similarities and differences of business cycle characteristics of the Asian countries and compares the cyclical regularities in this region with those of the G‐7 countries. The Asian economies are generally more volatile than the G‐7 countries, but the amplitude of economic fluctuations in the Asian countries tends to decrease over time. Comovement and persistence properties of business cycles in the Asian countries are very similar to those of the G‐7 economies. The authors find that while the patterns of business cycle fluctuations in the main macroeconomic aggregates display important similarities, the behavior of fiscal and monetary policy variables exhibits significant differences across the Asian countries. Moreover, there is a high degree of comovement between the individual country business cycles and different measures of the Asian business cycle, indicating that there is a regional business cycle specific to the Asian countries.     

Endogenous, Efficient Long-Run Cyclical Unemployment, Endogenous Long-Run Growth, and Division of Labor

The paper uses a dynamic equilibrium model to explain the concurrence of economic growth and business cycles. Introducing durable goods into a model with ex-ante identical consumer–producers and economies of specialized learning-by-doing, the author shows that when job-shifting costs, economies of specialized learning-by-doing, and trading efficiency are sufficiently large, a dynamic equilibrium with business cycles and unemployment might be Pareto superior to noncyclical growth patterns. Long-run cyclical unemployment still exists when the credit market is imperfect. Extending the model into overlapping generations framework, the author shows that complete division of labor with business cycles would still occur in equilibrium.     

Determinants of international transmission of business cycles to Turkish economy

This study aims to investigate the channels through which international business cycles are transmitted to Turkish economy. Our analysis follows two steps: i) business cycle transmission is measured using Longest Common Subsequence (LCS) method, a pattern recognition algorithm that accounts for the nonlinear and time-varying nature of business cycles and ii) the potential mechanisms of propagation of international business cycles are examined by specifying a panel regression model in which the LCS measure of synchronization is used as the dependent variable. Applying several panel estimation methods to the bilateral data from 22 countries over the 1998–2009 periods, we find that both trade and financial similarities are significant in the transmission of business cycles to Turkish economy. Especially, the results highlight the role of trade integration indicating that Turkish business cycles are closely linked with the business cycles of the members of European Custom Union.     

The Endogeneity of the Optimum Currency Area Criteria, Intra-industry Trade, and EMU Enlargement

This article tests the endogeneity hypothesis of optimum currency area (OCA) criteria in a cross-section of OECD countries in the 1990s. It argues that intraindustry trade induces convergence of business cycles, while no direct relation between business cycles and bilateral trade intensity is found. This finding confirms the OCA endogeneity hypothesis, but it underlines the role of trade specialization. Furthermore, the endogeneity of OCA criteria implies a comparable degree of business cycle harmonization of Central and Eastern European countries with the EU as for the current members in the medium run. (JEL F15 , F41 )     

ENDOGENOUS FLUCTUATIONS IN TWO‐COUNTRY MODELS*

This paper investigates the interlinkage in the business cycles of large‐country economies in a free‐trade equilibrium. We consider a two‐country, two‐good, two‐factor general equilibrium model with Cobb‐Douglas technologies and linear preferences. We also assume decreasing returns to scale in the consumption good sector. We first identify the determinants of each country's global accumulation pattern in autarky equilibrium, and secondly we show how a country's business cycles may spread throughout the world once trade opens. We thus give capital intensity conditions for local and global stability of competitive equilibrium paths.     

Technology,employment and the business cycle in post-transition countries of the EU

This article analyses the importance of technology and non-technology shocks in the business cycles of European Union post-transition countries. Different assumptions of New Keynesian and Real Business Cycle theory are tested. The results demonstrate that a non-technology shock is more important in explaining business cycles in post-transition countries, although a technology shock is not trivial. The technology shock cannot replicate basic business cycle facts observed in the data: it produces a low or negative correlation between employment and GDP, and a strong negative correlation between labour productivity and employment. Technology and non-technology GDP components are analysed in the transition and post-transition period. The results show a non-technology shock was the dominant source of business cycles both during and after the transition period.     

The Endogenity of the Optimum Currency Area Criteria

A country' suitability for entry into a currency union depends on a number of economic conditions. These include, inter alia , the intensity of trade with other potential members of the currency union, and the extent to which domestic business cycles are correlated with those of the other countries. But international trade patterns and international business cycle correlations are endogenous. This paper develops and investigates the relationship between the two phenomena. Using thirty years of data for twenty industrialised countries, we uncover a strong and striking empirical finding: countries with closer trade links tend to have more tightly correlated business cycles.     

Mentor Bouniatian on cycles and equilibrium

Although Mentor Bouniatian's theory of the business cycle is no longer referred to, it used to be often cited for its emphasis on time-lags (wherein he anticipated Aftalion) and for its early use of the acceleration principle. There are, moreover, additional elements of interest: he identified the conditions for a moving equilibrium, with some traits similar to the so-called ‘Harrod-Domar model’, he introduced the exogenous/endogenous distinction in business cycle theory, he was among the pioneers of the idea that growth cannot be dissociated from cycles and crises, and he discussed aspects of the ‘fallacy of composition’ problem.This paper examines these features of Bouniatian's theory of cycles and crises (as well as some frankly unsuccessful ones), both in terms of their relationships with contemporary developments in this area of research and in terms of their internal logic and methodology and their role in Bouniatian's analytical construction. As an upshot it is argued that although Bouniatian attempted to couch his theory in terms of the marginalist toolbox, his views on cycles ranges were more akin to the tradition of heretics, for he thought of crises not as a temporary deviations from equilibrium but perceived instead equilibrium as a temporary state of affairs in a world where overcapitalization is the norm rather than an exception.     

The transmission of business cyclesImplications for EMU enlargement1

We show that countries characterized by large bilateral trade and financial flows tend to have more correlated business cycles. However, we also find that countries with divergent fiscal policies and highly regulated labour markets are subject to idiosyncratic cycles. Applying these results to the new member states of the EU weakens the optimistic view towards the monetary integration of these countries into the euro area, which is frequently found in the literature. Although our results suggest that extensive trade and financial linkages are likely to result in further increases in business cycle correlation, an increase in labour market regulation and the pursuit of national fiscal policies may result in a counteracting effect.     

Further evidence on business cycle asymmetries in G7 countries

This paper tests for business cycle symmetry in G7 countries during the post-World War II period using a number of tests, each reflecting alternative definitions of business cycle asymmetry. The tests are applied to monthly coincident economic indicators of business cycles. This found that business cycles in the US are characterized by both longitudinal (deepness) and transversal (steepness and sharpness) asymmetries: further, it is found that asymmetric transition probabilties and time irreversibility are due to nonlinearities. On the contrary, business cycles in Germany exhibits a symmetric behaviour. Between these extremes are the other countries, for which at least one of the tests here considered rejects the null of cyclical symmetry. Particularly, business cycle is characterized by deepness and sharpness in Canada, asymmetry in persistence in France and Japan, and asymmetric transition probabilities in France and United Kingdom.     

Fiscal Convergence, Business Cycle Volatility, and Growth

This paper analyzes the effects of fiscal convergence on business cycle volatility and growth. Using a panel of 11 EMU and 21 OECD countries and 40 years of data, we find that countries with similar government budget positions tend to have smoother business cycles. That is, fiscal convergence (in the form of persistently similar ratios of government surplus/deficit to GDP) is systematically associated with smoother business cycles. We also find evidence that reduced business cycle volatility through higher fiscal convergence stimulates growth. Our empirical results are economically and statistically significant, and robust.