Time Delays and Business Cycles: Hilferding's model revisited

This paper develops a Marxian model of the business cycle based on Hilferding's theory of disproportionality in capital accumulation in a two-sector economy. The disproportionality arises from the existence of time delays in production generated by the differential capital intensity in the two sectors. The time delays produce an asymmetric price structure that causes overproduction and crisis. The model is constructed using delay-differential equations. Numerical simulations show that the model produces an economy-wide business cycle phenomenon. The domain of the time delay parameter is investigated, and shows that the model produces a wide variety of dynamics from monotonic convergence to explosive oscillations. Moreover, the solution shows that intersectoral investment flows transmit the instability in capital accumulation and that longer time delays produce higher cycle amplitudes.     

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.     

Business cycles synchronization in East Asia: A Markov-switching approach

This paper attempts to analyze the relationships between the ASEAN-5's business cycles. We examine the nature of business cycle synchronization trying to disentangle between intraregional and interregional synchronization by considering the important role of China, Japan and the US in synchronizing the activity within the ASEAN-5. We employ a time-varying transition probability Markov switching framework in order to allow the degree of synchronization to fluctuate across the phases of the business cycles. We provide evidence that the signals contained in some regional and global leading business cycles can impact the ASEAN-5's business cycles.     

Drowned by numbers? Stabilization properties of an EU-wide unemployment insurance system

The recent crisis has given rise to proposals for the creation of a European unemployment insurance system. We simulate an EU-wide mechanism under various scenarios, varying methods of financing (common or country-specific contribution rates) and triggers for pay-outs (all time or contingent clauses). We analyse the impact of the system using different measures of stabilization under different fiscal multipliers. A system operating during bad times (periods where the increase in unemployment is large) would reduce GDP growth variability but also growth correlation among member countries. Hence, there is a trade-off between stabilization and synchronization of national business cycles.     

Credit and business cycles’ relationship: evidence from Spain

This study provides evidence on the interaction between business and credit cycles in Spain during the period 1970–2014. The paper works on three analyses: the cycle turning points are identified; the main features of credit and business cycles are documented; and in both cycles the causal relationship is assessed. We find differences in the features of the business and credit cycle phases, which lead to a scant degree of synchronization over time. The lack of synchronization might be a sign that the cyclic interaction could be non-contemporaneous. Our results reveal that there is causation. A significant lagged relationship between business and credit cycles is found; specifically, fluctuations of the business cycle lead fluctuations of the credit to non-financial corporations and a lag exists with respect to the fluctuations of the credit to households. We also examine episodes of credit boom and credit crunch. In the period 1970–2014, Spanish credit booms did not involve deeper business cycle contractions and credit crunches were not associated with deeper and longer business cycle contractions. These differences are related with the great importance of the real estate sector in Spain.     

INTERNATIONAL CAPITAL FLOWS,BOOM‐BUST CYCLES,AND BUSINESS CYCLE SYNCHRONIZATION IN THE ASIA PACIFIC REGION

This article documents evidence of business cycle synchronization in selected Asia Pacific countries since the 1990s. We explain business cycle synchronization by the channel of international capital flows and boom‐bust cycles. Using the vector auto‐regression method, we find that most Asian countries experience boom‐bust cycles following capital inflows, where the boom in output is mostly driven by consumption and investment. Empirical evidence also shows that capital flow shocks are positively correlated in the region, which supports the conclusion that capital market liberalization has contributed to business cycle synchronization. (JEL F4)     

Business cycles synchronization in East Asian economy: Evidences from time-varying coherence study

This paper analyzes the feasibility of a monetary union in East Asia focusing on business cycles synchronization. Considering the critical role of trade integration in the East Asian integration process, we study whether East Asian countries are characterized by business cycle synchronization. The related empirical literature dedicated to business cycles synchronization in East Asia does not lead to firm conclusion. In this paper, we suggest a different empirical approach allowing, contrary to the previous studies, to detect endogenously structural changes in the comovement process between outputs. We apply a new measure based on the time-varying coherence function. Such a measure not only detects comovement dynamics but it distinguishes also this dynamics between short- and long-term. We compute also cohesion statistics to test if countries tend to be more synchronized or not. The main finding of this paper is that the increase in bilateral trade inside the East Asian region significantly improves long-run business cycle synchronization. The short-run influence of bilateral trade shows mixed results. Indeed, short-run cycles remain significantly influenced both by shocks hitting each country and by economic policy responses. As a consequence, more bilateral trade and convergence in economic policy constitute two complementary processes to promote business cycle synchronization.     

Balance Mechanics and Business Cycles

Abstract

Many mainstream business cycle theories were not able to cope with the financial crisis theoretically. With his concept of balance mechanics, the German economist Wolfgang Stützel developed a framework for comparing different theories of business cycles which helps to understand the reasons for this inadequacy. This paper works out Stützel’s considerations and his four “model cases” of cycles more systematically and shows how the theories of the business cycle Stützel mentioned are related to theories discussed today. Modern business cycle theories did not cover all “model cases” and therefore had a blind spot.     

The Nature of Financial and Real Business Cycles: The Great Moderation and Banking Sector Pro‐Cyclicality

This study takes a fresh look at the nature of financial and real business cycles in OECD countries using annual data series and shorter quarterly economic indicators. It first analyses whether the last cycle has been different compared to previous cycles in terms of length, amplitude, asymmetry and changes of these parameters during expansions and contractions. We also study the degree of economic and financial cycle synchronization between OECD countries but also of economic and financial variables within a given country and gauge the extent to which cycle synchronization changed over time. We next describe the connection between the great moderation and the last cycle. Finally, the study discusses the synchronization between the real economy and the financial sector and provides some new evidence on the banking sector's pro‐cyclicality by using aggregate and bank level. The main findings show that the amplitude of the real business cycle was becoming smaller during the great moderation, but asset price cycles were becoming more volatile. In part, this was linked to developments in the banking sector which tended to accentuate pro‐cyclical behaviour. Greater synchronization of cycles may help explain the severity of the crisis.     

Business Cycle Synchronization in EU: A Time‐Varying Approach

This article investigates the time‐varying correlation between the EU12‐wide business cycle and the initial EU12 member‐countries based on Scalar‐BEKK and multivariate Riskmetrics model frameworks for the period 1980–2012. The paper provides evidence that changes in the business cycle synchronization correspond to major economic events that have taken place at a European level. In the main, business cycle synchronization until 2007 had moved in a direction positive for the operation of a single currency, suggesting that the common monetary policy was less costly in terms of lost flexibility at the national level. However, as a result of the Great Recession of 2007 and the subsequent Eurozone Crisis, a number of periphery countries, most notably Greece, have experienced desynchronization of their business cycles with the EU12‐wide cycle. Nevertheless, for most countries, any questions regarding the optimality and sustainability of the common currency area in Europe should not be attributed to a lack of cyclical synchronization.     

The time-varying characteristics of the Chinese financial cycle and impact from the United States

ABSTRACT

Although there have been many empirical studies about the financial cycle since the financial crisis of 2008, few have analysed the structural changes in the Chinese financial cycle over time. The Chinese financial development process is short, and it is difficult to obtain accurate results on the measurement of the financial cycle. Based on wavelet analysis, this paper analyzes the time-varying characteristics of the Chinese financial cycle and the relationship between the financial and business cycles. In addition, we measure the impact from the United States. This paper draws three conclusions. Firstly, in terms of the characteristics of cycles, the existence of Chinese business cycle and financial cycle is proved, while the credit cycle, leverage cycle, stock market cycle and property cycle are quite different. Specifically, China has a 5.8-year credit cycle, an 8-year stock market cycle, 3.4-year and 12-year business cycles and a 15-year leverage cycle. Secondly, the financial cycles can serve as leading indicators of the business cycle, though the relationships between them are change overtime. Finally, the United States has a significant impact on the Chinese financial cycle with a ‘decoupling-recoupling’ effect, which is mainly reflected in the leverage cycle and the stock market cycle.     

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.     

Fiscal policy,government size and EMU business cycle synchronization

We provide new evidence on the effects of fiscal policy and government size on pairwise business cycle synchronization in EMU. A novel time-varying framework is employed to estimate business cycle synchronization and subsequently a panel approach is used to establish the role of fiscal variables in determining the pairwise synchronization observations across time. The findings suggest similarities in the size of the public sector, yet divergence in fiscal policy stance, matter for the determination of business cycle synchronization. Hence, increased fiscal federalism in EMU will contribute to increased business cycle synchronization. Our results remain robust to different specifications and sub-periods.     

Foreign direct investment and business cycle co-movements: The panel data evidence

The previous literature has largely overlooked the possible channels through which foreign direct investment (FDI) might influence business cycle synchronization. In this study we analyze the linkages that exist among FDI, trade and industrial dissimilarity in relation to business cycle co-movements using a panel data set taken from 77 pairs of developed countries. The error component three-stage least squares (EC3SLS) estimates from a simultaneous equations model with panel data are shown to be superior to the estimates obtained from single equation models or simultaneous equations models with cross-sectional data. Our results indicate that FDI serves as a channel of international business cycle transmission that is equally important as the channels of trade and monetary policy. On the contrary, industrial dissimilarity is identified as having an indirect impact on the business cycle correlation through trade and FDI. Furthermore, our findings suggest that in our sample FDI is of the horizontal type and tends to substitute for trade.     

Business cycle synchronization and African monetary union: A wavelet analysis

In this paper, we analyze the feasibility of an African monetary union based on the necessary condition of business cycle synchronization. In this regard, we examine the synchronization of growth cycles between five Regional Economic Communities (RECs) that will have to merge to form an African monetary union: the East African Community; the Economic Community of Central African States; the Economic Community of West African States; the Southern African Development Community; and the Arab Maghreb Union. To do this, we use a new continuous wavelet approach. Results show evidence of heterogeneous synchronization across time and horizons between the RECs. Controlling for the influence of some countries' membership in several RECs at the same time, the synchronization landscape does not improve. Overall, our results suggest that business cycle synchronization across the RECs has not yet reached a sufficient level to allow African countries to benefit from a common monetary policy.     

BUSINESS CYCLE,CURRENCY AND TRADE,REVISITED

This paper provides long‐run historical evidence for the link between business cycle synchronization, trade and the exchange rate regime. Using data from a large number of industrialized countries and a group of Asian economies, we examine this link in three sub‐periods: the first globalization period (1870–1913), the bloc economy period (1915–1959) and the second globalization period (1960–2004). The business cycle is identified as the series of deviates from a Hodrick–Prescott filtered trend. Cyclical turning points are located in the business cycles of our sample of 21 major countries, which enables us to comment on the characteristics of business cycles in the three periods. Cross‐correlations of the cyclical deviates are calculated for all the pairs of the 21 countries examined. It is apparent from casual inspection that the business cycle characteristics and the pattern of cross‐correlations in the bloc economy period are different from those found for the two globalization periods, whereas there is less difference between the two globalization periods. Following the estimations by Frankel and Rose, we relate business cycle synchronization to trade patterns and currency unions. Consequently, we find that European integration was already discernible in terms of business cycle synchronization in the early 1900s and that a similar synchronization was not discernible for Asia.     

The endogeneity of the Optimum Currency Area criteria in East Asia

The Asian financial crisis in mid-1997 has increased interest in policies to achieve greater regional exchange rate stability in East Asia. It has renewed calls for greater monetary and exchange rate cooperation. A country's suitability to join a monetary union depends, inter alia, on the trade intensity and the business cycle synchronization with other potential members of the monetary union. However, these two Optimum Currency Area criteria are endogenous. Theoretically, the effect of increased trade integration (after the elimination of exchange fluctuations among the countries in the region) on the business cycle synchronization is ambiguous. Reduction in trade barriers can potentially increase industrial specialization by country and therefore resulting in more asymmetry business cycles from industry-specific shocks. On the other hand, increased trade integration may result in more highly correlated business cycles due to common demand shocks or intra-industry trade. If the second hypothesis is empirically verified, policy makers have little to worry about the region being unsynchronized in their business cycles as the business cycles will become more synchronized after the monetary union is formed. This paper assesses the dynamic relationships between trade, finance, specialization and business cycle synchronization for East Asian economies using a Generalized Method of Moments (GMM) approach. The dynamic panel approach improves on previous efforts to examine the business cycle correlations — trade link using panel procedures, which control for the potential endogeneity of all explanatory variables. Based on the findings on how trade, finance and sectoral specialization have effects on the size of common shocks among countries, potential policies that can help East Asian countries move closer toward a regional currency arrangement can be suggested. The empirical results of this study suggest that there exists scope for East Asia to form a monetary union.     

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.     

Determinants of co-movement and of lead and lag behavior of business cycles in the Eurozone

In this paper we study business cycle correlations in the Eurozone and its determinants. Additionally, we also analyze the determinants of the lead and lag behavior of business cycles in the Eurozone. We explore the relevance, in the Eurozone context, using GDP and employment as the business cycle measures, of the determinants of business cycle synchronization identified in the literature, namely bilateral trade intensity, dissimilarity of labor market rigidity, dissimilarity in industrial structures, financial openness, and foreign direct investment relations. We estimate a simultaneous 4-equations model by Ordinary Least Squares (OLS) and three-stage least square to investigate empirically the above-mentioned determinants of business cycle correlation. Bilateral trade relations present a positive influence on business cycle correlations, while the dissimilarity of labor market rigidity presents a negative influence. The rest of the above-mentioned variables are non-significant. These results are robust to the use of the Hodrick–Prescott-filter and first differences as the de-trending methods, as well as the use of GDP as the business cycle measure, excluding the financial crisis years (2008 and 2009). Results for employment as the business cycle measure are in contrast with the previous ones, and found industrial dissimilarity to be the relevant variable to determine business cycles synchronization. In what concerns the determinants of the lead and lag behavior, results show that the member states of the Eurozone that usually lead the cycle are the ones that are wealthier, with strict employment legislation, more specialized in construction and finance sectors, and more prone to international capital movements. Differences in the determinants between contemporaneous business cycles and lead and lag behavior of business cycles are especially important for policy-makers in the Eurozone to know about, in particular if asymmetric shocks between countries are set in place.     

Business Cycle Synchronization in the Proposed East African Monetary Union: An Unobserved Component Approach

This paper uses the business cycle synchronization criteria of the theory of optimum currency area (OCA) to examine the feasibility of the East African Community (EAC) as a monetary union. We also investigate whether the degree of business cycle synchronization has increased after the 1999 EAC Treaty. We use an unobserved component model to measure business cycle synchronization as the proportion of structural shocks that are common across different countries, and a time‐varying parameter model to examine the dynamics of synchronization over time. We find that although the degree of synchronization has increased since 2000 when the EAC Treaty came into force, the proportion of shocks that is common across different countries is still small implying weak synchronization. This evidence casts doubt on the feasibility of a monetary union for the EAC as scheduled by 2012.