Trade wedges,inventories, and international business cycles

The large, persistent fluctuations in international trade that cannot be explained in standard models by changes in expenditures and relative prices are often attributed to trade wedges. We show that these trade wedges can reflect the decisions of importers to change their inventory holdings. We find that a two-country model of international business cycles with an inventory management decision can generate trade flows and wedges consistent with the data. Moreover, matching trade flows alters the international transmission of business cycles. Specifically, real net exports become countercyclical and consumption is less correlated across countries than in standard models. We also show that ignoring inventories as a source of trade wedges substantially overstates the role of trade wedges in business cycle fluctuations.     

Liquidity,assets and business cycles

The objective here is to evaluate the quantitative importance of financial frictions in business cycles. The analysis shows that a negative financial shock can cause aggregate investment, employment and consumption to fall with output. Despite this realistic comovement among macro quantities, a negative financial shock generates an equity price boom as the shock tightens firms׳ financing constraint. This counterfactual response of the equity price is robust to a wide range of variations in how financial frictions are modeled and whether financial shocks affect asset liquidity or firms׳ collateral constraints. Some possible resolutions to this puzzle are discussed.     

Economic integration,economic crises and economic cycles in Mexico

This article analyzes the peculiarity of the dynamics of economic fluctuations of the Mexican economy, within the framework of its integration with the US and Canada; the article demonstrates how the Mexican economy make endogenous the macroeconomic crises from the USA (2001 and 2007), and how the business cycles of both countries became more aligned to each other.Based on the heterodox economic theory of crises and cycles, we check the “empirical law of economic dynamics” of the Mexican capitalist system according to the logic of the multiplier–accelerator theory that allowed us to study the dynamics of business cycles for the period of the study (1993–2013). To do this, we construct and estimate a stationary VAR model and utilize the Granger causality tests and quarterly data.     

Political regimes,business cycles,seasonalities, and returns

This paper provides a method for testing for regime differences when regimes are long-lasting. Standard testing procedures are generally inappropriate because regime persistence causes a spurious regression problem – a problem that has led to incorrect inference in a broad range of studies involving regimes representing political, business, and seasonal cycles. The paper outlines analytically how standard estimators can be adjusted for regime dummy variable persistence. While the adjustments are helpful asymptotically, spurious regression remains a problem in small samples and must be addressed using simulation or bootstrap procedures. We provide a simulation procedure for testing hypotheses in situations where an independent variable in a time-series regression is a persistent regime dummy variable. We also develop a procedure for testing hypotheses in situations where the dependent variable has similar properties.     

Time series decomposition and measurement of business cycles, trends and growth cycles

A study of business cycles does not require trend estimation and elimination, but a study of growth cycles does. Major cyclical slowdowns and speedups deserve to be analyzed, but the needed time series decomposition presents difficult problems, mainly because trends and cycles influence each other. We compare cyclical movements in levels, deviations from trend, and smoothed growth rates for both the quarterly real GDP and the monthly U.S. Coincident Index—using the phase average trend (PAT). Then we compare alternative trend estimates, deterministic and stochastic, linear and nonlinear, and the corresponding series of deviations from these trends. We discuss how the resulting estimates differ for U.S. growth cycles in the post-World War II period. The results of PAT show great similarity to the results obtained with the Hodrick-Prescott, local linear trend, band-pass filtering methods.     

Investment shocks and business cycles

The origins of business cycles are still controversial among macroeconomists. This paper contributes to this debate by studying the driving forces of fluctuations in an estimated new neoclassical synthesis model of the U.S. economy. In this model, most of the variability of output and hours at business cycle frequencies is due to shocks to the marginal efficiency of investment. Imperfect competition and, to a lesser extent, technological frictions are the key to their transmission. Although labor supply shocks explain a large fraction of the fluctuations in hours at very low frequencies, they are irrelevant over the business cycle. This finding is important because the microfoundations of these disturbances are widely regarded as unappealing.     

Capital structure and business cycles

This study investigates the relationship between business cycles and capital structure. Specifically, it extends the work of Lemmon et al. (2008) , by incorporating the effect of four different stages of the business cycle – peak, contraction, trough and expansion – on the relative importance of the unobserved permanent component of the capital structure. Results indicate that business cycles play an important role in explaining the unobserved permanent component of leverage ratios after controlling for firm fixed effects. In particular, the model becomes much stronger in explaining the variation in leverage ratios after accounting for business cycle phases.     

Home production,labor wedges,and international business cycles

Non-separabilities due to home production break the link between market consumption and its marginal utility and help explain several stylized facts of the open economy. In an estimated two-country model with complete asset markets in which home production generates a labor wedge that mimics its empirical counterpart, output is more correlated than consumption across countries, labor inputs and labor wedges are positively correlated across countries, and relative market consumption is negatively related to the real exchange rate. Evidence from time use surveys corroborates some of the predictions of the model.     

Trade, production sharing, and the international transmission of business cycles

Countries that are more engaged in production sharing exhibit higher bilateral manufacturing output correlations. We use data on trade flows between US multinationals and their affiliates as well as trade between the United States and Mexican maquiladoras to measure production-sharing trade and its link with the business cycle. We then develop a quantitative model of international business cycles that generates a positive link between the extent of vertically integrated production-sharing trade and internationally synchronized business cycles. A key assumption in the model is a relatively low elasticity of substitution between home and foreign inputs in the production of the vertically integrated good.     

Durable goods,financial frictions,and business cycles in emerging economies

Business cycles in emerging economies display very volatile consumption and strongly countercyclical trade balance. We show that aggregate consumption in these economies is not more volatile than output once durables are accounted for. Then, we present and estimate a real business cycles model for a small open economy that accounts for this empirical observation. Our results show that the role of permanent shocks to aggregate productivity in explaining cyclical fluctuations in emerging economies is considerably lower than previously documented. Moreover, we find that financial frictions are crucial to explain some key business cycle properties of these economies.     

Money illusion,distribution effects and the household and business demands for money

This paper examines, using flow-of-funds data, the household and business demands for money. Questions explored include whether the demand for money should be expressed in nominal, real, per capita, or real per capita terms and whether distributional effects are important. In considering this latter point, we employ aggregate measures of inequality (i.e., Gini coefficients and variance of logarithms of income and business receipts) in the regression equations.     

Learning asymmetries in real business cycles

When a boom ends, the downturn is generally sharp and short. When growth resumes, the boom is more gradual. Our explanation rests on learning about productivity. When agents believe productivity is high, they work, invest, and produce more. More production generates higher precision information. When the boom ends, precise estimates of the slowdown prompt decisive reactions: investment and labor fall sharply. When growth resumes, low production yields noisy estimates of recovery. Noise impedes learning, slows recovery, and makes booms more gradual than downturns. A calibrated model generates growth rate asymmetry similar to macroeconomic aggregates. Fluctuations in agents’ forecast precision match observed countercyclical errors of forecasters.“There is, however, another characteristic of what we call the trade cycle that our explanation must cover; namely, the phenomenon of the crisis—the fact that the substitution of a downward for an upward tendency often takes place suddenly and violently, whereas there is, as a rule, no such sharp turning point when an upward is substituted for a downward tendency.” J.M. Keynes (1936)     

Gold rush fever in business cycles

A flexible price model of the business cycle is proposed, in which fluctuations are driven primarily by inefficient movements in investment around a stochastic trend. A boom in the model arises when investors rush to exploit new market opportunities even though the resulting investments simply crowd out the value of previous investments. A metaphor for such profit driven fluctuations are gold rushes, as they are periods of economic boom associated with expenditures aimed at securing claims near new found veins of gold. An attractive feature of the model is its capacity to provide a simple structural interpretation to the properties of a standard consumption and output Vector Autoregression.     

Asymmetric business cycles: Theory and time-series evidence

We offer a theory of economic fluctuations based on intertemporal increasing returns: agents who have been active in the past face lower costs of action today. This specification explains the observed persistence in individual and aggregate output fluctuations even in the presence of i.i.d shocks because individuals respond to the same shock differently depending on their recent past experience. The exact process for output, the sharpness of turning points and the degree of asymmetry are determined by the form of heterogeneity. Our general formulation, under certain assumptions, reduces to a number of popular state space (unobserved components) models. We find that on US data our general formulation performs better than many of the existing econometric models, largely because it allows sharper downturns and more pronounced asymmetries than linear models, and is smoother than discrete regime shift models. Our estimates imply that only modest intertemporal returns are needed for our model to explain US GNP, and that heterogeneity across agents plays an important role in the propagation of business cycle shocks.     

Anticipated growth and business cycles in matching models

In a business cycle model that incorporates a standard matching framework, employment increases in response to news shocks, even though the wealth effect associated with the increase in expected productivity reduces labor force participation. The reason is that the matching friction induces entrepreneurs to increase investment in new projects and vacancies early. If there is underinvestment in new projects in the competitive equilibrium, then the efficiency gains associated with an increase in employment make it possible that consumption, employment, output, as well as the investment in new and existing projects jointly increase long before the actual increase in productivity materializes. If there is no underinvestment, then investment in existing projects decreases, but total investment, consumption, employment, and output still jointly increase.     

International business cycles with domestic and foreign lenders

We examine the international transmission of business cycles in a two-country model where credit contracts are imperfectly enforceable. In our economy, foreign lenders differ from domestic lenders in their ability to recover value from borrowers’ assets and, therefore, to protect themselves against contractual non-enforceability. The relative importance of domestic and foreign credit frictions changes over the cycle. This induces entrepreneurs to adjust their debt exposure and allocation of collateral between domestic and foreign lenders in response to exogenous productivity shocks. We show that such a model can explain the comovement of output across countries.     

The spirit of capitalism and expectation-driven business cycles

While news shocks are believed to be instrumental in explaining business cycles, many existing models fail to predict a boom in consumption, investment, employment, output and asset prices in response to good news about future productivity. A model with the intrinsic desire for wealth is shown to generate the aforementioned responses. A news-driven boom is explained predominantly by an expansion of labor supply and is characterized by the falling real wage. The simulated model not only captures well conventional business cycle statistics, but also reproduces countercyclical real returns and hump-shaped responses of hours and output to an unexpected technology shock.     

Chinese IPO activity,pricing, and market cycles

We examine the activity, pricing, and market cycles of 1,380 Chinese A share IPOs over the period 1991–2005 and find initial underpricing of 238%. The government restrictions on IPO offer price and quota allocation cause pricing structural breaks and attribute more than half of initial underpricing. A multifactor model that includes firm’s characteristics, excess demand for IPO shares, and the government restrictions explains cross-sectional initial returns, after controlling for industrial differences and stock market conditions. In addition, monthly IPO volume and average initial return are highly correlated. A VAR model indicates that initial return leads IPO volume by 6 months.     

Costs of business cycles for unskilled workers

Unskilled workers are subject to a much larger risk of unemployment during recessions than are skilled workers. Moreover, unskilled workers earn less income, which limits their ability to self-insure. We examine how this heterogeneity in unemployment risk and income across different skill groups translates into heterogeneity in the cost of business cycles. We find that the welfare cost of business cycles for unskilled workers is substantially higher than the welfare cost for skilled workers.     

Money,income, and sunspots: Measuring economic relationships and the effects of differencing

This paper discusses the question of whether economic time series regression models should be estimated between the levels or the changes of the variables of interest. We argue that many economic models should be estimated between the changes of the variables, rather than the levels of the variables. In addition, comparisons of the levels and changes regressions can be used as a crude test of model specification. These issues are illustrated with examples from Friedman and Meiselman's (1963) study of annual income and consumption and with data on sunspot activity from 1897–1958.