Permanent and transitory components of recessions

We propose a generalization of existing empirical business cycle models that allows us to decompose recessions into permanent and transitory components. We find that the transitory component of recessions accounts for between 77% and 96% of the observed variance of monthly indicator series. Our results suggest the following three-phase characterization of the business cycle: recession, high-growth recovery during which output partially reverts to its previous peak, and normal growth following the recovery. In addition, we find significant timing differences between the permanent and transitory components of recessions; most notably the lack of the usual high-growth recovery phase following the 1990–91 recession. Final version April 5, 2001     

The recession's effect on hospital registered nurse employment growth

Recessions are not uncommon in the United States, but the most recent recession is arguably the most severe economic downturn since the Great Depression of the 1930s. Although recessions result in increases in national unemployment in most sectors of the economy, they have resulted in increases in registered nurse (RN) employment as many non-working married RNs re-enter the workforce when their spouses lose their jobs. Over the past decade, hospital RN employment increased by more than 400,000 with virtually all of this growth associated with the two recessions that occurred during this period. The most recent recession led to an increase in hospital RN employment that was not only unprecedented in size, estimated at nearly 250,000, but was marked by the employment of large numbers of RNs over 50 years of age. While national unemployment rates remain high, hospitals should prepare for an eventual jobs recovery when many RNs are likely to leave the workforce.     

A look at jobless recoveries in G7 countries

We study changes in the plucking behavior of employment growth, as well as changes in its relationship with the output cycle in the G7 countries. Using both revised and real-time data, we consider several popular measures of the output cycle. For most countries, we see significant evidence in favor of structural changes in the response coefficients of employment growth to its own gap, suggesting much slower recoveries in labor markets, consistent with the jobless recoveries hypothesis. However, we also find evidence in favor of heterogeneity across countries, both in the responses of employment to employment gaps and in the responses of employment to the output cycle.     

Productivity dynamics and the cleansing effect of two recessions: Evidence from the manufacturing sector in Korea

In general, recessions provoke the exit of a greater number of firms from the market. Less productive firms are more likely to exit and release their former resources to the remaining, more productive firms. The present study investigates two recessions in Korea: the Asian financial crisis and the global financial crisis. The main objective of the present study is to analyse the process of creative destruction in a recession, specifically the cleansing effect. We measured total factor productivity using micro‐level manufacturing plant data from 1993 to 2013. We decomposed the source of the changes in total factor productivity to measure the cleansing effect in two large recessions. During the first recession in the 1990s, there was no evidence to support a cleansing effect hypothesis. In contrast, during the second recession in the 2000s, there was evidence of a cleansing effect. In addition, we found differences in market selection criteria in the two recessions; by the second crisis, the market selection criteria had changed to enable a more conducive environment for the creative destruction process.     

Cyclical Dynamics of the Turkish Economy and the Stock Market

Abstract

We analyze the cyclical dynamics of the Turkish economy and the stock market as well as their interactions. We use hidden Markov models that are robust to parameter instability arising from major shifts in economic policy, which have been typically observed in the Turkish economy. These models provide estimates of turning points for the growth, business, and stock market cycles. We identify three states of growth cycles and two states of business cycles in Turkey characterized by different mean estimates. We find that the economy went through five recessions since 1987. Crises are characterized by sharp drops in economic activity and are preceded by slowdowns. These crises are typically followed by strong recoveries during which the economy grows above its long-run average rate. We show that the Turkish stock market goes through three regimes having distinct risk-return dynamics. Bear markets associated with negative returns precede every recession with an average lead time of three quarters, suggesting that the stock market may be a useful forward-looking indicator of the Turkish economy.     

The shape of recovery: Implications of past experience for the duration of the COVID-19 recession

In this paper we seek to make headway on the question of what recovery from Covid-19 recession may look like, focusing on the duration of the recovery – that is, how long it will take to re-attain the levels of output and employment reached at the prior business cycle peak. We start by categorizing all post-1960 recessions in advanced countries and emerging markets into supply-shock, demand-shock and both-shock induced recessions. We measure recovery duration as the number of years required to re-attain pre-recession levels of output or employment. We then rely on the earlier literature on business cycle dynamics to identify candidate variables that can help to account for variations in recovery duration following different kinds of shocks. By asking which of these variables are operative in the Covid-19 recession, we can then draw inferences about the duration of the recovery under different scenarios. A number of our statistical results point in the direction of lengthy recoveries.     

THE EFFECT OF THE BUSINESS CYCLE ON FRESHMAN FINANCIAL AID

When the economy slips into recession, more needy students enroll in college, increasing the need for financial aid while resources for aid become more scarce. We use “Freshman Survey” data from the Higher Education Research Institute to observe changes in financial aid composition from 1980 to 2000. We use state‐level tax revenues, unemployment rates, and personal income growth as macroeconomic indicators. During recessions, we find that the burden of financing a student's college education shifts from states and institutions to families and federal programs. We also show that these macroeconomic fluctuations are increasingly volatile for underrepresented minorities. (JEL I22, H52, E32)     

The time-varying relationship between credit spreads and employment growth

After the global financial crisis, several central banks introduced unconventional monetary policies, such as quantitative easing (QE). If QE increases asset prices, but does not boost the real economy to the same extent, the relationship between credit spreads and employment growth will weaken. This study investigates this issue for the U.S. in a moving-windows framework. Our results suggest that the link between credit spreads and employment growth is lower during bubbles and recessions. We also find that the relationship weakened after the Fed introduced QE.     

Human capital heterogeneity of the unemployed and jobless recoveries

The jobless recovery enigma remains largely unsolved. As a special case of broader unemployment, the term “jobless recovery” describes an economic recovery where output recovers—and even expands—yet employment growth remains anemic. While the effects of these prolonged recoveries are significant—from increased crime to a lifetime reduction in wages—they are not well understood. Building on the insights of labor market matching models that incorporate heterogeneity among workers, this paper sheds light on jobless recoveries, developing a first-of-its-kind index of human capital heterogeneity for the unemployed, and testing that index using of a Structural Vector Autoregression. I demonstrate that the extent to which unemployed human capital is heterogeneous and specific, rather than homogeneous and general, plays a key and under-appreciated role in the labor market; increases in human capital heterogeneity can account for between one-quarter to three-quarters of the joblessness of the past three recoveries in the pre-COVID era.     

Good skills in bad times: Cyclical skill mismatch and the long-term effects of graduating in a recession

We show that cyclical skill mismatch, defined as mismatch between the skills supplied by college graduates and skills demanded by hiring industries, is an important mechanism behind persistent career loss from graduating in recessions. Using Norwegian data, we find a strong countercyclical pattern of skill mismatch among college graduates. Initial labor market conditions have a declining but persistent effect on match quality and skill mismatch early in their careers. Match quality of the first employment may explain up to half of the short-term and most of the long-term earnings loss from graduating in a recession.     

What happens during recessions, crunches and busts?

We provide a comprehensive empirical characterization of the linkages between key macroeconomic and financial variables around business and financial cycles, for 21 OECD countries over the period 1960–2007. In particular, we analyse the implications of 122 recessions, 113 (28) credit contraction (crunch) episodes, 114 (28) episodes of house price declines (busts), 245 (61) episodes of equity price declines (busts), and their various overlaps in these countries, over the sample period. Our results indicate that the interactions between macroeconomic and financial variables can play a major role in determining the severity and duration of a recession. Specifically, we find evidence that recessions associated with credit crunches and house price busts tend to be deeper and longer than other recessions.
— Stijn Claessens, M. Ayhan Kose and Marco E. Terrones     

Growth and the cycle: Creative destruction versus entrenchment

Newly estaboished firms often try to secure their market position by building up a base of loyal customers. While recessions may not destroy technological leadership, they may be harmful for such firm-customer relationships. Without such customer bases, these firms find themselves more vulnerable to attacks by competitors. We formulate this idea within an Aghion-Howitt-type model of creative destruction and discuss its implications for growth. In the context of this model, recessions might be good for growth since they weaken the incumbent firm's position and, thereby, stimulate research by outside firms. The model allows for the extreme case where the leading firm can be so entrenched that growth ceases, unless a recession shakes up its customer base. We find a one-to-one relationship between the average growth rate and the cyclical variability, a U-shaped relationship between the average speed of building up good customer relationships and the average growth rate, and a positive relationship between the arrival rate of recessions and average growth. It is finally shown that an appropriate stochastic tax program can implement the social planner's solution. In some cases, general-equilibrium effects may generate interesting results, conflicting with intuition from a partial-equilibrium approach: we show that, in some cases, a social planner might want to subsidize research in order to discourage it.     

European commission’s fiscal forecasts in CEE countries: a thorough assessment

ABSTRACT

This paper assesses European Commission’s fiscal forecasts for a sample of 10 Central and Eastern European countries between 2005 and 2015. The analysis focus on forecasts of the budget balance, revenues, expenditures and debt and pays special attention to dynamics around business cycle turning points. Results suggest that the distribution of projection errors appears to be biased towards optimism of fiscal aggregates and accuracy increases as the forecast horizon shortens. We also find evidence of “forecast smoothing”. In addition, we find that, on average, the extent of optimism seems to increase during recessions (and to a lesser extent during recoveries). Moreover, errors in forecasting fiscal variables can be explained by forecasts errors of real GDP growth and inflation.     

Nonlinearities in the U.S. wage Phillips curve

We examine the relationship between wage inflation and the unemployment rate in the U.S. economy for the 1964–2014 period by means of a three-regime threshold regression model. The estimated threshold parameters suggest that this relationship changes when the unemployment rate transitions between regimes defined by 5.61% and 7.63%. During mild recessions and their subsequent recoveries, the time-varying estimates of the model indicate a negative relationship between both variables, consistent with the implications of a wage Phillips curve (WPC) derived from the standard New Keynesian model with staggered wage setting in Galí (2011). However, we find that this relationship breaks down during deep recessions and their recovery periods, which explains the difference between wage inflation predicted by standard New Keynesian models and the observed low wage growth in the aftermath of the ‘Great Recession’. This finding and the fact that statistical tests strongly favor our three-regime model suggest that linear and two-regime models are insufficient to account for all the variability in the relationship between wage inflation and unemployment.     

Going up and down: rethinking the empirics of growth in the developing and newly industrialized world

Growth dynamics are remarkably heterogeneous, in particular when one focuses on developing countries. Economic miracles and failures are embedded within extended phases of either growth or decline. In this paper, we analyze the growth patterns of developing and newly industrialized countries on the basis of structural breaks and growth regimes experienced. Emphasizing the presence of broken trends, we focus on the difference between expansionary and recessionary regimes of medium length, and we show that models of takeoffs and exponential growth are inadequate to characterize the majority of observed growth dynamics. Then, we move to a systematic classification of different patterns and we isolate an additional stylized fact characterizing the process of growth and development. In particular, our results show that expansionary regimes are associated with convergence and positive correlation between growth and (short run) volatility. By contrast, in recessionary regimes, poorer countries face deeper failures and a negative correlation between growth and volatility is found, indicating that output fluctuates less around the trend during strong rather than mild recessions. Catching-up phenomena are infrequent but more likely to occur across categories of growth patterns rather than within. Finally, we discover that regimes of growth and recession show similar average length (about 16 years). Although recessions are, on average, remarkably pronounced (14% loss of GDP per capita), the magnitude of growth is much larger during expansions. In sum, our results underline that stable positive growth is hardly achieved in developing countries, which rather alternate long phases of expansions with equally long phases of recession. Moreover, cross-sectional empirical regularities are found to differ between regimes of positive and negative growth.     

COMPARING THE NEW ENGLAND AND SOUTHERN CALIFORNIA REGIONAL RECESSIONS

During the early 1990s, both New England and Southern California experienced regional recessions that were much more severe than the national recession of 1990–1991. At first glance, these regional recessions appear to be similar phenomena. However, shift-share analysis conducted at the 3-digit Standard Industry Classification (SIC) level indicates that the underlying causes of the recessions were different. During the late 1980s and early 1990s, New England's manufacturing industries did not perform nearly so well as their national counterparts in creating new jobs and preventing job losses. The loss of regional competitiveness was the main factor explaining that region's recession. On the other hand, most of Southern California's industries performed about as well as their national counterparts during the recession. For Southern California, the industry structure of the region—in particular, its heavy reliance on defense-related production—contributed to the recession more than did a loss of regional competitiveness.     

THE ELASTICITY OF SUBSTITUTION BETWEEN TIME AND MARKET GOODS: EVIDENCE FROM THE GREAT RECESSION

We document a change in household shopping behavior during the Great Recession. Households purchased more on sale, larger sizes, and generic products and increased coupon usage and shopping at discount stores. We estimate a decline in returns to shopping during the recession. Therefore, the increase in shopping behavior implies a significant decrease in households' opportunity cost of time. Using the estimated cost of time and time use data, we estimate a high elasticity of substitution between market expenditure and time spent on nonmarket work. We find that households smooth a sizable fraction of consumption by varying their time allocation during recessions.     

Do credit shocks matter? A global perspective

This paper examines the importance of credit market shocks in driving global business cycles over the period 1988:1–2009:4. We first estimate common components in various macroeconomic and financial variables of the G-7 countries. We then evaluate the role played by credit market shocks using a series of VAR models. Our findings suggest that these shocks have been influential in driving global activity during the latest global recession. Credit shocks originating in the United States also have a significant impact on the evolution of world growth during global recessions.     

Exploring the big jump in the Spanish unemployment rate: Evidence on an ‘added-worker’ effect

Spain is destroying more jobs than any other European country. In the third quarter of 2009, the unemployment rate stood at 17.9%, the second-highest rate in the 27-nation EU and the highest rate in the euro area (EA-16). The exponential growth of the Spanish unemployment rate is the by-product of falling employment rates. However, there is a second explanation which is often overlooked by unemployment forecasters: changes in labour force participation rates. On the one hand, in times of recession participation rates tend to increase in order to safeguard sustainable household incomes. This phenomenon is known as the ‘added-worker’ effect. On the other hand, there is also an opposite effect in that individuals leave the labour force in recessions because chances to find employment are low. This is the ‘discouraged-worker’ effect. Applying a threshold cointegration model to Spanish quarterly data over the period 1976-2008, we find that the added-worker effect dominates the discouraged-worker effect, but only when unemployment is below 11.7%. Above this threshold, the two effects cancel each other out so that the participation rate is not influenced by further deteriorations of economic conditions. Since Spain recently passed the 11.7% unemployment threshold, our model predicts that there will be no further increases in the participation rate in the near future.     

Forecasting the probability of US recessions: a Probit and dynamic factor modelling approach

Abstract Quantifying the probability of U.S. recessions has become increasingly important since August 2007. In a data‐rich environment, this paper is the first to apply a Probit model to common factors extracted from a large set of explanatory variables to model and forecast recession probability. The results show the advantages of the proposed approach over many existing models. Simulated real‐time analysis captures all recessions since 1980. The proposed model also detects a significant jump in the next six‐month recession probability based on data up to November 2007, one year before the formal declaration of the recent recession by the NBER.