Determinants of business cycles in small scale macroeconomic models: the German case

We identify measures of shocks to total factor productivity and preferences from two real business cycle models and subject them to Granger causality tests to see whether they can be considered exogenous to other plausible sources of the German business cycle. For West German data from 1960.i to 1989.iv we conclude that our measures of shocks are indeed exogenous. This contrasts with similar studies for other countries that question the exogeneity of either productivity or preference shocks. For the period 70.i to 01.iv we find that M3 Granger causes all of our shock measures. We attribute this to the breaks in our time series associated with the German reunification in 1990 and the European Monetary Union in 1999.Earlier versions of this paper circulate as University of Augsburg economics discussion paper no. 213 and Kiel Institute for World Economics working paper no. 1158, respectively.     

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.     

中国转型期的信贷波动与经济波动

本文基于1981-2002年的季度数据,考察了在经济转轨的不同阶段我国信贷波动的特征,并通过时差相关分析和Granger因果关系检验,分析了信贷波动与经济周期波动的相互关系.结果表明,总体上信贷波动与经济周期波动基本同步,信贷扩张和收缩是产生经济周期波动的显著影响因素,但这种影响从20世纪90年代中期开始有所下降,同时,信贷波动的内生性开始显现.     

An examination of business cycle features in UK Sectoral Output

This article examines business cycle features of UK Gross Domestic Product (GDP) sectors with regard to trends, cycles and growth. The empirical study adopts the Kalman filter to decompose these GDP sectors into trend and cycle components. The general model of this study encompasses a number of alternative specifications about trend growth, therefore accommodating diverse views on growth. There is reasonable support in the results for a mean-reverting stochastic growth model for the UK economy. The characteristics in trends and cycles of UK GDP sectors are discussed, focusing on their similarities and differences around business cycles.     

The Effects of Business Cycles on Growth - Time Series Evidence for the G7-countries Using Survey-based Measures of the Business Cycle

The paper analyses whether business cycle fluctuations affectlong-run growth. This hypothesis is tested using quarterly timeseries for the G7-countries. A vector-autoregressive model containingtotal factor productivity and a survey-based direct measureof the business cycle is estimated. In this vector-autoregression,technology and business cycle shocks are identified based onthe assumption that productivity-improving measures need sometime and, thus, there is no contemporaneous response of productivityto a business cycle innovation. The results suggest that positivebusiness cycles shocks have a small negative impact on long-runproductivity. However, the results appear to be not robust againstchanges in the empirical model.(JEL E32, O41)     

Durability and Asymmetry in UK Consumers' Expenditure

Cook et al. (1998) have recently proposed the hypothesis of a positive relationship between the durability of consumers' expenditure and the asymmetric behaviour it exhibits. Some support was found for this hypothesis via the application of Sichel's (1993) univariate tests of business cycle asymmetry to quarterly data on the components of UK consumers' expenditure. In this paper this hypothesis is revisited, with the original analysis extended in a number of ways. First, the hypothesis is examined using annual data over a longer span than the original study, potentially allowing more business cycles to be captured. Secondly the effects of alternative means of detrending, a prerequisite for the analysis, are considered. Using durable, non-durable and total consumption data for the UK, the 'durability-asymmetry' hypothesis is found to hold. It is also found that a previously noted aggregation paradox disappears, but a new temporal aggregation paradox is uncovered. Significantly, the manner in which the data are detrended is also seen to influence results.     

UNDERSTANDING THE INTERACTION BETWEEN INTERNATIONAL AND EURO AREA OUTPUT VOLATILITY

This paper addresses two main questions. First, it seeks to establish whether the stylized facts of the ‘great moderation’ that have been documented for the UK and US economies can be found for the Euro area. Second, it explores possible explanations for any changes that have occurred in the volatility of Euro area output fluctuations. In examining why business cycles have moderated, much of the existing literature has tended to concentrate on a few key factors. These include shifts in the structure of the economy, improved monetary policy and a ‘good luck’ factor. This paper, however, follows a relatively new branch of the great moderation literature by focusing on whether international business cycle linkages have changed in a way that may have perpetuated the dampening in Euro area output fluctuations. The results show Euro area output fluctuations to have significantly reduced in variability over the last quarter of a century. The results go on to highlight that, although Euro area cycles differ little from rest of the world cycles, the moderation in Euro area output fluctuations is only marginally due to changes in international business cycle linkages and smaller international and domestic shock variances.     

Multivariate Markov Switching Common Factor Models for the UK

We estimate a model that incorporates two key features of business cycles, comovement among economic variables and switching between regimes of boom and slump, to quarterly UK data for the last four decades. A common factor, interpreted as a composite indicator of coincident variables, and estimates of turning points from one regime to the other, are extracted from the data by using the Kalman filter and maximum likelihood estimation. Both comovement and regime switching are found to be important features of the UK business cycle. The composite indicator produces a sensible representation of the cycle and the estimated turning points agree fairly well with independently determined chronologies. These estimates are sharper than those produced by a univariate Markov switching model of GDP alone. A fairly typical stylized fact of business cycles is confirmed by this model – recessions are steeper and shorter than recoveries.     

Demand shocks and firm-financed R&D expenditures

Business cycles might affect firms'?ability and incentive to perform R&;D. Firms finance most R&;D activities out of cash flow so when cash flow decreases the funds available for R&;D also decreases. This limits the ability of firms to perform R&;D, potentially leading to reduced R&;D expenditures during recessions. 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. This paper tests whether the business cycle influences the incentive and ability of firms to engage in R&;D activities, in particular examining whether the response is symmetric across the business cycle.     

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.     

IMPLEMENTATION CYCLES,INVESTMENT, AND GROWTH*

We develop a model of “intrinsic” cycles, driven by the decentralized behavior of entrepreneurs and firms making continuous, divisible improvements in their productivity. We show that when the introduction of productivity improvements is endogenous, implementation cycles arise even in the presence of reversible investment and consumption smoothing. The implied cyclical equilibrium is unique within its class and shares several features in common with actual business cycles. In particular, its predictions are qualitatively consistent with the joint behavior of the investment rate and Tobin's Q during U.S. recessions.     

Heterogeneous Risk Preferences and the Welfare Cost of Business Cycles

I study the welfare cost of business cycles in a complete-markets economy where some people are more risk averse than others. Relatively more risk-averse people buy insurance against aggregate risk, and relatively less risk-averse people sell insurance. These trades reduce the welfare cost of business cycles for everyone. Indeed, the least risk-averse people benefit from business cycles. Moreover, even infinitely risk-averse people suffer only finite and, in my empirical estimates, very small welfare losses. In other words, when there are complete insurance markets, aggregate fluctuations in consumption are essentially irrelevant not just for the average person - the surprising finding of Lucas (1987) - but for everyone in the economy, no matter how risk averse they are. If business cycles matter, it is because they affect productivity or interact with uninsured idiosyncratic risk, not because aggregate risk per se reduces welfare.     

Testing for Seasonal Stability in Unemployment Series: International Evidence

Recently, it has been shown that seasonal and business cycles are related and a similar economic mechanism is at work in producing both types of cycles (Miron 1996). Thus, an analysis of seasonal fluctuations sheds light on the nature of the business cycle. This paper uses the classical test developed by Hylleberg et al. and the LM-type tests proposed by Canova and Hansen (1995) to investigate seasonal behavior in the unemployment series of Australia, Canada, Japan, New Zealand, the US and a number of OECD countries. The main findings are that the Australian, Austrian and Canadian series are non-stationary at all seasonal frequencies, French, Japan, the NZ and the UK series are stationary at all seasonal frequencies and the USA series is stationary only at the annual frequency. The test results for other series are mixed, suggesting that further analysis is required to reach a definite conclusion. The series, except for France, Japan, New Zealand and the UK, appear to possess unstable seasonal patterns, indicating changing business cycle conditions.     

Aggregate profitability and income distribution in the UK corporate sector, 1963–1985

This paper analyses the secular and cyclical behaviour of the rate of profit for the UK corporate sector from 1962 to 1985, using the growth accounting framework developed by Weisskopf (1979) for the USA, and the labour share decomposition of Henley (1987). The results show that the five per cent per annum decline in net profit rate in the UK over the period is explained in part by each of the three factors of declining profit share, declining capital productivity and, to a lesser extent, declining capacity utilization. As in the USA profitability peaks prematurely in each business cycle as a result of distributional pressure. Further decomposition of these components points to the importance of inadequate growth of real labour productivity as an explanatory factor, and to the inability of firms to protect profit share from the effect of the pre-1979 growing employer labour tax burden. The post-1980 profit revival in the UK is not explained by a ‘breakthrough’ in terms of an improved growth rate of labour or capital productivity but rather by the sheer length of the sustained business upswing and, as yet, absence of the usual midcycle upward pressure on labour share.     

CAUSALITY IN POLITICAL BUSINESS CYCLES

One can easily identify four general models of political business cycles: office-motivated models (both forward and backward looking) and partisan models (again, both forward and backward looking). Each model makes different assumptions about the direction and timing of causal links between the economy and polity. This paper uses Granger causality tests to investigate the causal links between presidential popularity and different measures of aggregate economic performance and aggregate economic policy. The paper's aim is to investigate whether any existing theories receive substantive support and, if not, to suggest the properties that any new theories should display. The results indicate no overwhelming support for any existing theories, though partisan models receive more support than do office-motivated models. The data appear to be most consistent with Ellis and Thoma's reputational partisan model.     

CAUSALITY IN POLITICAL BUSINESS CYCLES

One can easily identify four general models of political business cycles: office-motivated models (both forward and backward looking) and partisan models (again, both forward and backward looking). Each model makes different assumptions about the direction and timing of causal links between the economy and polity. This paper uses Granger causality tests to investigate the causal links between presidential popularity and different measures of aggregate economic performance and aggregate economic policy. The paper's aim is to investigate whether any existing theories receive substantive support and, if not, to suggest the properties that any new theories should display. The results indicate no overwhelming support for any existing theories, though partisan models receive more support than do office-motivated models. The data appear to be most consistent with Ellis and Thoma's reputational partisan model.     

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.     

The financial cycles in four East Asian economies

This paper characterizes proxy measures of financial cycles using available data on four East Asian economies, viz., Hong Kong, Malaysia, the Philippines and Thailand. Spectral analysis is adopted to characterize the financial cycles and these cycles are compared with the business cycles of the four East Asian economies. The empirical findings indicated that with the exception of the equity price growth in Hong Kong, the period of the proxy measures for financial cycles is slightly longer than the period of the business cycle. More to the point, there is no evidence to show that the period of the proxy measures for financial cycles in these economies are operating at low frequencies similar to the period of the cycles of between 8 to 32 years observed for advanced economies such as the US, UK and Germany. Taking one step further, the paper finds that the financial cycles of these four economies are better captured by a band-pass filter estimated using the periods obtained in the paper as opposed to using long period cycles of between 8 to 32 years. These findings imply that one needs to be careful in making an a priori assumption on the frequency range the financial cycle is believed to operate.     

Expansions and contractions in Brazil, Colombia and Mexico: A view through nonlinear models

The study of asymmetric behavior of macroeconomic variables over business cycles has had a long tradition in economics. In this present work, we find evidence in favor of the hypothesis of having a STAR-type nonlinear asymmetric behavior of the economic activity, over the last two decades, in three Latin American countries: Brazil, Colombia, and Mexico. For Chile and Venezuela, the null hypothesis of a linear process could not be rejected under the method established by Granger and Teräsvirta [Granger, C.W.J., Teräsvirta, T., 1993. Modelling Nonlinear Relationships. Oxford University Press, New York]. Economic activity is proxied by monthly based industrial production indexes. Evidence of asymmetric behavior is also found according to the generalized impulse response functions analysis for the three countries.     

Real wages,inflation and labour productivity in Australia

This article presents an analysis of real wages, inflation and labour productivity interrelationships using cointegration, Granger causality and, most importantly, structural change tests. Applications of tests to Australian data over the 1965 to 2007 period corroborate the presence of a structural break in 1985 and show that a 1% increase in manufacturing sector real wages led to an increase in manufacturing sector productivity of between 0.5% and 0.8%. Comparable estimates for the effect of inflation on manufacturing sector productivity have limited statistical significance. Granger causality test results suggest that real wages and inflation both Granger cause productivity in the long run.