Public investment and business cycles: The case of Japan

This paper examines the effect of public investment on macroeconomic fluctuations in Japan by comparing the effects of central and local government investments. Impulse response functions show that central government investments slightly but persistently stimulate industrial production, while local government investments have no positive impact on business cycles. In terms of policy effectiveness, these results suggest that the Japanese government should not employ local public sector investments as a policy instrument for economic stabilization.     

International and intranational business cycles

This paper surveys and analyses the international real businesscycle literature. We re-explore two international business cycleanomalies emphasized by Backus, Kehoe, and Kydland (1995) aswell as establishing the pattern of productivity growth betweenindustries and countries. We then compare these findings forthe international business cycle to those obtained for databetween regions within a country - the so-called 'intranationalbusiness cycle'. Importantly, the intranational business cycleis a natural environment for thinking about the interactionsbetween economies when there are no trade frictions and whenthere are not multiple currencies. We summarize our findingswith a comparison between the stylized facts for internationaland intranational business cycles and draw some policy conclusions.     

The synchronization of business cycles across the European Community

The recent adoption of the Delors Report brings into question the extent of the EC integration and the costs to individual countries of continued integration. In this paper we address this question by comparing EC countries to non-EC countries, specifically comparing the extent to which domestic policies are coordinated. We find a strong coordination between EC countries as compared to non-EC countries. However, Italy shows up as a persistent outlier in the EC, requiring a reformulation of domestic policy goals if continued integration is desired.     

Endogenous business cycles and dynamic inefficiency

This paper explores how the occurrence of local indeterminacy and endogenous business cycles relates to dynamic inefficiency, as defined by Malinvaud (1953), Phelps (1965) and Cass (1972). We follow Reichlin (1986) and Grandmont (1993) by considering a two-period overlapping generations model of capital accumulation with labor–leisure choice into the first-period of an agent's life and consumption in both periods. We first show that local indeterminacy and Hopf bifurcation are necessarily associated with a capital–labor ratio that is, at steady state, larger than the Golden Rule level. Consequently, paths converging asymptotically towards the steady state are shown to be dynamically inefficient, as there always exists another trajectory that starts with the same initial conditions and produces more aggregate consumption at all future dates. More surprising, however, is our main result showing that stable orbits, generated around a dynamically inefficient steady state through a supercritical Hopf bifurcation, may, in contrast, be dynamically efficient.     

Persistence of business cycles in multisector real business cycle models

In this paper we explore whether the changing composition of output in response to technology shocks can play a significant role in the propagation of shocks over time. For this purpose we study two multisector real business cycle models, with two and three sectors. We find that, although the two-sector model requires a high intertemporal elasticity of substitution of consumption to match the various dynamic properties of US macroeconomic data, the three-sector model has a strong propagation mechanism under conventional parameterizations, as long as the factor intensities in the three sectors are different enough.     

Measuring business cycles in the Russian Empire

Newly available data on Russian commerce, industry, finance, incorporations, labour, and investment allow a fresh approach to two historical puzzles: the dating of cyclical peaks and troughs in Russia during the six decades before the First World War and the evaluation of theories advanced to explain the causes of these cycles. A diffusion index and a composite index establish the dates and amplitudes of seven complete cycles from 1855 to 1909 and part of an eighth, in 1910–13, interrupted by the First World War. The influence of wars and the Revolution of 1905 on the Russian cycle is clear. A comparison of diffusion indices for Russia and Germany reveals that Russian cycles occasionally diverged from the European pattern in the absence of war and revolution, notably during the industrial boom of the 1890s. The new findings give qualified support to the contention of several Soviet economists in the 1920s that this divergence resulted, at least in part, from the monetary stimulus of exports, primarily of grain.     

A structural decomposition of business cycles in Taiwan

The purpose of this paper is to examine the influence of foreign and domestic factors on the business cycle of Taiwan. Using a structural vector-autoregressive model of a small open economy (OE), we examine how the influences of these factors differ as a result of trade flows and liberalization efforts. The results suggest that Taiwanese output has remained quite immune to global shocks in spite of the financial liberalization of the 1980s. Furthermore, as Asia has become Taiwan's major trading partner, so too has Asia become the major foreign influence on Taiwan's business cycle. Indeed, in many ways Taiwan appears to have gained resilience from foreign shocks, rather than forfeited domestic stability.     

Intra-regional trade and business cycles in Southeast Asia

Conclusion In this note we considered the relationship between trade integration and the cross-country correlation of business cycle activity in southeast Asia. We found a positive and significant relationship between the degree of bilateral trade intensity and the cross-country bilateral correlation of business activity over the period 1986–1996, a period when trade integration was proceeding rapidly. Thus, the Frankel and Rose (1997) finding that more trade integration between industrialized countries tends to result in more highly synchronized business cycles, appears to be robust to a sample of countries which have diverse income levels and economic structures and are likely to have less bilateral intraindustry trade.     

Measuring Chinese business cycles with dynamic factor models

The Stock–Watson method and the dynamic Markov switching factor (DMSF) model are employed to construct macroeconomic composite coincident indexes for the Chinese economy, January 1990–March 2008. Four coincident indicators, namely, industrial production, investment in fixed assets, sales revenues, and the money supply, M₁, are selected to compute the coincident index. Strong asymmetries are found with recent business cycles in China characterized by expansions of longer duration and smaller amplitude relative to the contraction stage. The two models produce similar composite index series, but the DMSF model shows frequent transitions that are difficult to interpret. A comparison of the composite coincident index and other measures of macroeconomic activity provides economic interpretations of the patterns in the index. There are notable differences between the index and GDP growth rates over this period, reflecting its more comprehensive measurement of economic activity. This more comprehensive view of macroeconomic activity increases understanding of changes in China's policies and economic fluctuations that are not shown by GDP growth rates alone.     

The permanent income hypothesis,business cycles,and regime shifts: Evidence from eight countries

Summary We provide international evidence on the joint behavior of consumption and the real rate of interest and examine the rational expectations restrictions of the permanent income hypothesis. We extend the basic model to allow for independent effects of the stage of the business cycle or a regime shift after 1979. In our eight-country sample (using 1970s–1980s data) we find a small but internationally similar rate of intertemporal substitution once we allow for a regime shift affecting the average growth of consumption after 1979. The rational expectations restrictions are formally rejected, most prominently for the United Kingdom and Japan.We thank Ivo Arnold, Eduard Bomhoff, Fanz Palm, Peter Schotman, Carlo Winder, and anonymous referees for their comments and suggestions. All remaining errors are of course our own.     

Real business cycles in an open economy: An application to Germany

Real Business Cycles in an Open Economy: An Application to Germany. — This paper discusses a stochastic, dynamic-optimizing model of an open economy. It is closely related to small open economy models, but differs by introducing an upward-sloping supply curve of foreign bonds. The model is calibrated to match the long-run features of Germany. The simulations show that the model is consistent with the observed regularities of German business fluctuations.     

Postwar business cycles in Japan: A quest for the right explanation

This paper explores the nature of postwar business cycles in Japan. Our basic strategy is to study different production behaviors of various manufacturing industries over business cycles. We are particularly interested in the problems of whether only monetary shocks are important and, if not, what kind of real shocks are important. We conclude that purely monetary theory is inadequate, and that construction activities were major causes of aggregate fluctuations in the pre-first oil shock period of rapid growth. We also present some evidence suggesting that real business cycle theory is implausible.     

The German inflation and foreign business cycles, 1920–1922

The real fluctuations of the German macroeconomy in the early 1920s differed markedly from those of the other major industrial economies. As the others began a steep depression in 1920, German prices stabilized and the economy grew, led by increased investment in response to the stabilization of the political climate. German income growth increased its trade deficits for about a year and cushioned the onset of the depression abroad. In summer 1921, however, as Germany began paying reparations, inflation restarted and investor confidence ebbed. The German boom strengthened then because exports increased and filled the gap left by lagging investment. As Germany struggled to pay reparations, her export boom worsened the depression of demand in the Allied economies, struggling then to recover from the depression.     

Finnish and Swedish business cycles in a global context

This paper evaluates the decisions made by the Finnish government to join EMU and the Swedish government not to join EMU in the early 1990s. Focusing on the characteristics of business cycles during the postwar period, we find that output fluctuations in Sweden and Finland are correlated to two measures of the international business cycle, a European and a non-European cycle. The Finnish cycle has become more synchronized to the European cycle but less synchronized to the non-EU cycle after 1999. For Sweden we find the opposite result. The decision by the Finnish government to join EMU on schedule is justified ex post but was not justified ex ante. Similarly, the decision by the Swedish government not to join EMU in 1999 seems to be justified ex post but was not justified ex ante. Our empirical evidence suggests that economic decisions based on historical data may not be optimal ex ante but they may be defensible ex post.