Steepness and deepness in the Australian macroeconomy

This study uses nonparametric tests - the triples test and the BDS test, to examine whether key Australian macroeconomic aggregates exhibit nonlinearities and important ‘steepness’ and ‘deepness’ asymmetries at the business cycle frequency., Evidence is found of nonlinearities but there is little evidence of deepness in the Australian macroeconomy., However, there is evidence of steepness, especially concerning labour market variables, as well as both the CPI and M3., The evidence suggests that unemployment (employment) rises (falls) rapidly in recessions and only recovers slowly over time., Also, positive asymmetries in M3 are reflected in similar asymmetries in the CPI but not in output, consumption or investment.     

The Australian Business Cycle: Joe Palooka or Dead Cat Bounce?

We address the question of whether asymmetry in the business cycle and asymmetry in the persistence of negative versus positive shocks characterises Australian output growth. Using nonlinear time series models we provide some evidence consistent with the idea that Australian output growth is characterised by three distinct phases: contractions, high-growth recovery periods and 'normal' or moderate growth periods. This implies that Australian output fluctuations have a significant transitory component and is supportive of the 'output-gaps' view and 'plucking' model view of economic fluctuations. In contrast to recent evidence for the US and Canada however, we find that Australian GDP growth does not exhibit important asymmetries in the responses of output growth to positive and negative shocks.     

Key Features of Australian Business Cycles

This paper identifies and describes the key features of Australian business cycles during the period 1959–2002. In particular, we identify the chronologies in Australia's classical cycle (expansions and contractions in the level of output) and growth cycle (periods of above-trend and below-trend rates of economic growth). We find that while there are large asymmetries in the duration and amplitude of phases in Australia's classical cycle, on both measures the Australian growth cycle is much more symmetric. Further, our results indicate that over the sample period Australian (filtered) output and prices have moved in a counter-cyclical fashion, suggesting a dominance of shocks to aggregate supply affecting the Australian economy.     

Business cycle duration dependence and foreign recessions

This study revisits business cycle duration dependence in G7 countries by controlling for foreign recessions, defined as the number of other G7 countries in a recession. Estimates from regime switching logit models show that the monthly likelihood of ending an expansion roughly doubles for every extra G7 country in recession, but the end of foreign recessions do not affect the ending of recessions. They also show that recessions are duration dependent in all G7 countries, but expansions only in the United States and Germany. The economic importance of foreign recessions and duration in driving business cycle phase changes vary across countries.     

Business cycle dynamics with duration dependence and leading indicators

Durland and McCurdy [Durland, J.M., McCurdy, T.H., 1994. Duration-dependent transitions in a Markov model of US GNP growth. Journal of Business and Economic Statistics 12, 279–288] investigated the issue of duration dependence in US business cycle phases using a Markov regime-switching approach, introduced by Hamilton [Hamilton, J., 1989. A new approach to the analysis of time series and the business cycle. Econometrica 57, 357–384] and extended to the case of variable transition parameters by Filardo [Filardo, A.J., 1994. Business cycle phases and their transitional dynamics. Journal of Business and Economic Statistics 12, 299–308]. In Durland and McCurdy’s model duration alone was used as an explanatory variable of the transition probabilities. They found that recessions were duration dependent whilst expansions were not. In this paper, we explicitly incorporate the widely-accepted US business cycle phase change dates as determined by the NBER, and use a state-dependent multinomial Logit modelling framework. The model incorporates both duration and movements in two leading indexes – one designed to have a short lead (SLI) and the other designed to have a longer lead (LLI) – as potential explanatory variables. We find that doing so suggests that current duration is not only a significant determinant of transition out of recessions, but that there is some evidence that it is also weakly significant in the case of expansions. Furthermore, we find that SLI has more informational content for the termination of recessions whilst LLI does so for expansions.     

Labor market dynamics over the business cycle: evidence from Markov switching models

This paper explores the evolution of the U.S. labor market across the business cycle and specifically the relationship between the unemployment rate and the average duration of unemployment. Labor market recoveries have long been thought of as lagging recoveries in broad economic activity. In particular, the unemployment rate peaks several months after official business cycle troughs and the average duration of unemployment lags further behind. Using estimates from Markov switching models of the unemployment rate, average duration of unemployment, jobless claims, and the exhaustion rate of regular unemployment insurance, this paper dates contractionary and expansionary phases of various aspects of the labor market and their relationship to the official phases of the business cycle. Evidence from these models suggests that inflows into unemployment recover almost contemporaneously with broad economic activity, while outflows recover almost a year after the end of official recessions. The differential timing in the recoveries of unemployment inflows and outflows, which is not a characteristic of most macro models of the labor market, accounts for the observed pattern between the unemployment rate and average duration of unemployment. Finally, when comparing the phases of the labor market to periods where Congress extends unemployment insurance benefits, it appears that policymakers target periods where the job finding rate is low, rather than periods where the stock of unemployed workers is high.     

Can oil shocks explain asymmetries in the US Business Cycle?

We consider whether oil prices can account for business cycle asymmetries. We test for asymmetries based on the Markov switching autoregressive model popularized by Hamilton (1989), using the tests devised by Clements and Krolzig (2000). We find evidence against the conventional wisdom that recessions are more violent than expansions: while some part of the downturn in economic activity that characterises recessionary periods can be attributed to dramatic changes in the price of oil, post-War US economic growth is characterized by the steepness of expansions. First Version Received: December 2000/Final Version Received: September 2001     

Quarterly US unemployment: Cycles,seasons and asymmetries

This paper documents three stylized facts for the quarterly unemployment rate in the United States. Firstly, unemployment is asymmetric over the business cycle, i.e. it rises sharply in recessions and it falls slowly in expansions. Secondly, its seasonal fluctuations are not constant across the two business cycle stages in the sense that there is less seasonality in recession periods. Thirdly, the effect of shocks to the unemployment rate in expansions seem transitory, while this effect is permanent in recessions. Some implications of these stylized facts for empirical macroeconomics and seasonal adjustment are discussed.     

Cyclical Asymmetries in Unemployment Rates: International Evidence

This paper investigates to what extent the observed nonlinearities in the unemployment rates of six major developed economies are the response to cyclical asymmetries. Two classes of models are compared: strict smooth transition autoregressions and models where the transition variable is GDP growth, which is considered a more direct indicator of the business cycle. The empirical evidence points out that nonlinearities in unemployment rates are induced by cyclical asymmetries. It is also found that in most countries the unemployment rate looks stationary and reverts to a long-run equilibrium rate in periods of normal growth, while in extreme cyclical situations it tends to become nonstationary as if each extreme cyclical episode had its own path of equilibrium.      

DO THE PHASES OF THE BUSINESS CYCLE DIE OF OLD AGE?

The paper re-examines the issue of duration dependence in the Australian classical and growth business cycles in light of the somewhat surprising results obtained recently by Cashin and Ouliaris (2004). In so doing the authors use the multinomial logit regime switching modelling approach of Layton and Smith (2003). The paper also represents an extension of the earlier work on the issue undertaken by Bodman (1998); the key extensions being that the issue is framed within an explicit established business cycle chronology, a leading index is also included within the analysis, and the growth cycle, in addition to the classical cycle, is considered. Strong evidence of duration dependence is found for periods of recession within the classical cycle and for both phases of the growth cycle. Moderate evidence of duration dependency is also found for periods of classical cycle expansion. However, the evidence in this regard is significantly reduced once movements in the leading index are included in the analysis with its movements exhibiting strong power in predicting the termination of classical business cycle expansions. For growth cycles, duration dependence symmetry is found across both phases of the cycle.     

The Portuguese business cycle: chronology and duration dependence

This paper tries to identify a chronology for the Portuguese business cycle and test for the presence of duration dependence in the respective phases of expansion and contraction. A duration-dependent Markov-switching vector autoregressive model is employed in that task. This model is estimated over year-on-year growth rates of a set of relevant economic indicators, namely industrial production, a composite leading indicator and, additionally, civilian employment. The estimated specifications allow us to identify four main periods of contraction during the last three decades and some evidence of positive duration dependence in contractions, but not in expansions, especially when employment is added to the model.     

How do financial cycles affect public debt cycles?

We employ the duration framework to study determinants of public debt cycles in 57 advanced and emerging economies over the 1960–2014 period, with a particular focus on the impact of financial cycles. The results suggest that the association between financial and debt cycles is asymmetric. Debt expansions preceded by overheating in credit and financial markets tend to last longer than other expansions, but there is no significant association between financial cycles and debt contractions. There is strong evidence of duration dependence in both phases of the cycle, with the likelihood of expansions and contractions to end increasing with the length of their respective spells. Higher initial level of debt increases the spell of contractions (persistence of adjustment effort hypothesis) and reduces the spell of expansions (debt sustainability hypothesis). The results are robust to the inclusion of global factors, openness, political stability, and debt crisis indicators as additional controls.     

Oil Price Shocks and the Asymmetric Adjustment of UK Output: A Markov-switching approach

This paper examines the role played by real oil price shocks in influencing the growth in UK GDP. Our particular interest is the possibility that asymmetries might exist in such a relationship. Using Hamilton's regime-switching estimation, we consider whether oil price shocks influence both the deepness and duration of the business cycle. We find that asymmetries arise insofar as oil price appreciation is most likely to curtail the duration of the expansionary phase of the business cycle. This result is in contrast to existing studies of the oil price-macroeconomy relationship that have largely concerned the US.     

Recurrent unemployment,welfare benefits and heterogeneity

The objective of this paper is to investigate the causes of the recurrences of individuals in unemployment during benefit periods. So as to attain this objective, we use administrative data from the Spanish Employment Agency to estimate a duration model with multiple spells that allows for unemployment state dependence through lagged unemployment duration in order to distinguish the heterogeneity and scarring effects. We find that an increase in the duration of previous unemployment benefit periods lengthens the expected duration of future unemployment benefit periods. True state dependence and heterogeneity, intensity of job search and local labour market conditions are among the elements that explain this unemployment state dependence.     

Output volatility in Australia

A number of papers have documented a significant decline in real GDP volatility in several major OECD economies. Some authors have presented evidence to suggest that this is the outcome of a one-off structural break from a high to low volatility state whilst others have estimated regime switching models that indicate low volatility regime states have dominated in recent years. This article provides further evidence on the general properties of output volatility for Australia, including evidence of a significant moderation in output volatility for the country that occurred in the early 1980s. Estimates of various GARCH models of real GDP growth are also provided to further examine shorter term volatility features of the Australian economy that are associated with its business-cycle. A regime shift dummy is maintained in all models of the conditional variance in order to account for the regime shift in volatility and evidence is found of significant business-cycle effects, including leverage effects and asymmetries that suggest recessions are times of higher output volatility than economic expansions. Overall, it is concluded that the so-called ‘Great Moderation’ in macroeconomic instability, as documented here for Australia, is a result of a myriad of economic, institutional and policymaking changes.     

Interest rates,government purchases and the Taylor rule in recessions and expansions

In this paper we study asymmetries in the Taylor rule for the United States during the 1970–2012 period. We show that monetary authorities have been constantly concerned with excess demand in overheated periods – when the output gap is positive or the unemployment rate falls below 7% or 7.5% – raising the interest rate aggressively in that case. However, the Fed seems more reluctant to decrease the fund’s rate during recessions. On the contrary, monetary authorities react symmetrically and forcefully to inflation in booms and busts. Finally, we provide evidence that an expansionary fiscal policy does not lead to an increase in interest rates, and thus there is not necessary a “crowding-out” effect in recessions.     

ASYMMETRIC EFFECTS OF THE BUSINESS CYCLE ON FIRM-FINANCED R&D

Abstract

Business cycles might affect the ability of firms to finance R&D, since firms rely on cash flow to finance most R&D activities. However, business cycles also influence the incentive to perform R&D. The opportunity cost of funds devoted to R&D falls during recessions, since the return on production will likely be lower than during an expansion. During recessions, this provides firms with an incentive to redistribute an existing pool of funds away from production and towards R&D projects. The changes in the size and distribution of the pool may also be asymmetric across the business cycle. For example, cash-flow constraints are more likely to bind during recessions than expansions. This paper finds strong evidence for the cash-flow effect, but not the opportunity-cost effect. This means that R&D is pro-cyclical, but smoothing out the business cycle will actually lead to reduced R&D, since the duration of expansions exceeds the duration of recessions.     

Reservation wage analysis of unemployed youths in Australia

This paper focuses on the analysis and structural estimation of the reservation wage function from a job search model using modified 2SLS and maximum-likelihood procedures with selectivity bias adjustments. The existing structural approaches to estimation are also reviewed. Empirical estimates of the determinants of the reservation wages of unemployed youths in Australia are obtained using data from the Australian National Longitudinal Survey. The results support most of the predictions of the job search model and indicate the presence of positive duration dependence in unemployment. These findings differ from the populaly held view of declining probability of escape from unemployment as its duration increases. There is also evidence which suggests that quantity constraints are important in determining unemployment in Australia.     

Endogenous Cycles and Growth with Indivisible Technological Developments

When large, discrete technological improvements require the accumulation of research or infrastructural investment over time, growth paths display cyclical patterns even in the absence of any shocks. Particularly interesting equilibrium features of these cycles include declines in output and asymmetries in the cyclic patterns displayed during expansions and recessions.Journal of Economic LiteratureClassification Numbers: E22, E32, O41.     

Macroeconomic Conditions at Entry and Injury Risk in the Workplace

Using a unique dataset from Italy, we show that the local unemployment rate at entry has a persistent positive effect on severe and non‐severe workplace injuries of young workers. Entrants during recessions, despite receiving marginally higher entry wages, also experience slower wage growth. The observed pattern in the differences between severe and non‐severe injuries indicates that entrants during recessions might under‐report non‐severe workplace injuries. Our findings suggest that workers entering during recessions are persistently locked into low‐quality jobs and that the mix of hazardous tasks endogenously adjusts to the business cycle.