Multi-dimensional risk and the cost of business cycles

This paper analyzes the welfare costs of business cycles when workers face uninsurable idiosyncratic labor income risk. In accordance with the previous literature, this paper decomposes labor income risk into an aggregate and an idiosyncratic component, but in contrast to the previous literature, this paper allows for multiple sources of idiosyncratic labor income risk. Using the multi-dimensional approach to idiosyncratic risk, this paper provides a general characterization of the welfare cost of business cycles when preferences and the (marginal) process of individual labor income in the economy with business cycles are given. The general analysis shows that the introduction of multiple sources of idiosyncratic risk never decreases the cost of business cycles, and strictly increases it if there are cyclical fluctuations across the different sources of risk. This paper also provides a quantitative analysis based on a version of the model that is calibrated to match US labor market data. The quantitative analysis suggests that realistic variations across two particular dimensions of idiosyncratic labor income risk increase the welfare cost of business cycles by a substantial amount.     

Matching frictions,unemployment dynamics and the cost of business cycles

We investigate the welfare cost of business cycles implied by matching frictions. First, using the reduced form of the matching model, we show that job finding rate fluctuations generate intrinsically a non-linear effect on unemployment: positive shocks reduce unemployment less than negative shocks increase it. For the observed process of the job finding rate in the US economy, this intrinsic asymmetry increases average unemployment, which leads to substantial business cycles costs. Moreover, the structural matching model embeds other non-linearities, which alter the average job finding rate and consequently the welfare cost of business cycles. Our theory suggests to subsidizing employment in order to dampen the impact of the job finding rate fluctuations on welfare.     

Model uncertainty,economic development,and welfare costs of business cycles

Some researchers argue that the welfare gains from eliminating consumption fluctuations for the United States are not small once model uncertainty is taken into account. This paper presents new evidence on the welfare gains from eliminating model uncertainty using a data set from a broad range of countries. It quantifies exactly the effect of model uncertainty on the welfare gains using an analytical formula. The results indicate that most countries derive much larger gains from the reduction of model uncertainty compared with the United States. Countries at higher stages of economic development tend to have lower welfare gains because their gains from eliminating model uncertainty become smaller. This relationship does not depend on country size or trade openness.     

Agency costs and business cycles

Summary. This paper develops a model with endogenous agency costs that is otherwise quite similar to the canonical real business cycle model. The traditional assumption in the literature is that these agency costs arise in the production of investment goods. In contrast, this paper assumes that these costs are all encompassing in the sense that they arise in the production of aggregate output. The paper explores both the importance of the investment vs. output assumption for business cycle dynamics, and the conditions under which these agency models can deliver amplification and/or persistence. The paper has two principal conclusions. First, in terms of amplification and propagation, the output model performs worse than does the investment model. This arises because a variable distortion in the investment market has more of an impact than a comparable distortion in the output market. Second, in this model with optimal consumption choice by entrepreneurs, there is a clear tension between amplification and persistence. Received: December 30, 1997; revised version: April 1, 1998     

On the integration of growth and business cycles

This paper discusses several approaches to generating the observed persistence in macro models and presents evidence in favor of models where endogenous technology adoption propagates transitory shocks into the medium term. Prepared for the Conference on “The Interrelation of Cycles and Growth” in honor of Gunther Tichy.

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Countercyclical markups and news-driven business cycles

The standard one-sector real business cycle model is unable to generate expectations-driven fluctuations. The addition of countercyclical markups and modest investment adjustment costs offers an easy fix to this conundrum. The simulated model replicates the regular features of U.S. aggregate fluctuations.     

Bond market seasonality and business cycles

The objective of this paper is to analyze the impact of business cycles on the monthly seasonality of fixed income securities. In general, the results suggest that the average monthly returns of fixed income securities during economic contractions are higher than during economic expansions. For the government and high-grade corporate bonds, average returns in November are significantly higher in the periods of economic contractions. In addition, no monthly seasonality is found during economic expansions. For the low-grade corporate bond returns, January effect is found in both economic expansions and contractions periods.     

Political business cycles and construction licensing

We analyze the effects of opportunistic and partisan politics on the licensing of construction activities, which in turn determines the level of housing supply. In line with Political Business Cycle theory, we hypothesize that the municipal incumbent may manipulate the supply of construction permits before (general and local) elections in order to boost economic activity and voter satisfaction, or to accommodate special‐interest groups. Our findings, based on time‐series data from post‐socialist Tirana (Albania), are consistent with opportunistic and partisan incentives’ creating cycle effects in the licensing of construction permits. However, we find that the direction of opportunistic election cycles depends critically on the interaction between the municipal incumbent and the central‐level government. Our paper raises important questions about the effects of transition politics on spatial development in post‐socialist cities.     

Global banking and international business cycles

This paper incorporates a global bank into a two-country business cycle model. The bank collects deposits from households and makes loans to entrepreneurs, in both countries. It has to finance a fraction of loans using equity. We investigate how such a bank capital requirement affects the international transmission of productivity and loan default shocks. Three findings emerge. First, the bank's capital requirement has little effect on the international transmission of productivity shocks. Second, the contribution of loan default shocks to business cycle fluctuations is negligible under normal economic conditions. Third, an exceptionally large loan loss originating in one country induces a sizeable and simultaneous decline in economic activity in both countries. This is particularly noteworthy, as the 2007–09 global financial crisis was characterized by large credit losses in the US and a simultaneous sharp output reduction in the US and the Euro Area. Our results thus suggest that global banks may have played an important role in the international transmission of the crisis.     

Nonlinear dynamism of innovation and business cycles

The aim of this paper is to describe the nonlinear dynamism of innovation and to clarify the role of innovation for economic development in terms of Kondratiev business cycles, especially the causal relation of the bubble economy and depressions with innovations. Any paradigm of technological innovation develops within a definite time span reaching maturity. This nonlinear nature clarifies many characteristic features of innovation. Schumpeters innovation theory on business cycles is examined through this dynamism. Trunk innovation is defined as that which plays a decisive role in building infrastructures and inducing subsequent innovations. Every innovation has its own technological development period just before the innovation diffusion. The emergence of new markets can be estimated by chasing the ongoing technologies.JEL Classification: E32, L16, O11, O14, O30Paper presented at the 9th Conference of the International J.A. Schumpeter Society, Gainesville, Florida, USA.Previous affiliation was Ryutsu Kagaku University, Faculty of Information Science, Kobe, Japan.     

商业模式研究现状与未来发展方向探索

首先分析商业模式的学科属性,认为商业模式是经济学、财务管理、战略管理、创新管理等经济管理学科的交叉学科。在此基础上,梳理近些年商业模式研究情况,发现鲜有学者研究商业模式与财务之间的关系。因此,提出研究商业模式与财务、特别是财务战略间关系的重要性,并对未来的研究方向进行展望。     

Revisiting the welfare effects of eliminating business cycles

We investigate the welfare effects of eliminating business cycles in a model with substantial consumer heterogeneity. The heterogeneity arises from uninsurable and idiosyncratic uncertainty in preferences and employment status. We calibrate the model to match the distribution of wealth in U.S. data and features of transitions between employment and unemployment. In comparison with much of the literature, we find rather large effects. For our benchmark model, we find welfare effects that, on average across all consumers, are of a bit more than one order of magnitude larger than those computed by Lucas [Lucas Jr., R.E., 1987. Models of Business Cycles. Basil Blackwell, New York]. When we distinguish long- from short-term unemployment, long-term unemployment being distinguished by poor (and highly procyclical) employment prospects and low unemployment compensation, the average gain from eliminating cycles is as much as 1% in consumption equivalents. In addition, in both models, there are large differences across groups: very poor consumers gain a lot when cycles are removed (the long-term unemployed as much as around 30%), as do very rich consumers, whereas the majority of consumers—the “middle class”—sees much smaller gains from removing cycles. Inequality also rises substantially upon removing cycles.     

Intra-industry trade and business cycles in ASEAN

The innovation adoption literature has focused primarily on a producer's decision of whether and how much to adopt. An equally pertinent question is when to adopt, because in the case of new technologies it often ‘pays to wait’ for more information. We propose a double-limit hurdle model to analyse adoption intensity and inertia in the context of a divisible technology. The proposed framework incorporates probit or Tobit models as testable special cases. A maximum likelihood estimation framework is set out and generalized to account for heteroscedastic errors. The empirical analysis, which uses household-level data from India's semi-arid tropics, provides new insights into the factors influencing adoption inertia and intensity.     

Discoveries, innovations, and business cycles

There is considerable evidence that the density of basic innovations is peaked at definite periods with intervals of about 40–60 years. This has been used as support for the behavior of economic cycles as postulated by Kontradieff and amplified by Schumpeter. Recently some economists have used this model to forecast economic recovery in the middle or late 1980s.This paper points out that the shape of the clusters of innovation or inventions are different and sharper than those of economic depression or economic recovery. The transfer of knowledge from basic inventions to industrial innovations shortens as one moves from the 18th to the 20th century, and some probable explanations for this are offered. The importance of discoveries and limited discoveries to the process of invention and innovation is discussed. Also shown is that discoveries reveal cluster phenomena which are functionally related to the clusters of invention and innovation.     

An Austrian view of expectations and business cycles

Austrian economists have contributed several important concepts to business cycle theory including: inter-temporal coordination of production and consumption, heterogeneous specificity of capital, non-neutrality of money, and the capital structure of production. Noticeably lacking, however, is a clear theory of expectations. Recent Austrian responses to rational expectations critiques—such as positing a prisoner’s dilemma, heterogeneous entrepreneurs, and adverse selection—try to fill this gap. But much work remains to be done developing an Austrian theory of expectations, one where they are endogenous to the market process and market institutions. This paper explores how people adapt their expectations to changing market phenomena based upon their perceived costs and benefits of doing so. It then applies endogenous expectations to the 2008 financial crisis.     

Subprime borrowers,securitization and the transmission of business cycles

A growing literature (e.g., Jaffee et al. 2009, Acharya and Schnabl 2009) argues that securitization improves financial stability if the securitized assets are held by capital market participants, rather than financial intermediaries. I construct a quantitative macroeconomic model with a novel specification for mortgage‐backed securities (MBS) to evaluate this claim. My findings suggest that the existence of the securitization market stabilizes the economy under the condition that financial intermediaries do not engage in the acquisition of securitized assets. In the presence of large negative housing preference shocks, the drop in output in the first year after the shock is halved if subprime MBS are purchased by non‐financial agents rather than held by banks.     

International business cycles and the relative price of investment goods

Abstract Is the relative price of investment goods a good proxy for investment specific technology? We model this relative price in a flexible price international economy with two fundamental shocks, namely, the total factor productivity (TFP) shock and the investment‐specific technology (IST) shock. We show that the one‐to‐one correspondence between the IST shock and the relative price of investment goods breaks down in an international economy because of the short‐run correlation between the terms of trade and the relative price of investment goods. The data congruent negative correlation between the investment rate and the relative price of investment goods thus does not necessarily reflect decline in investment frictions (rise in IST), as suggested by many studies. A calibration experiment with the US data demonstrates that such an inverse relation between rate of investment and the relative price of investment goods basically reflects the positive effect of TFP on the terms of trade for a broad range of economies where the home bias in consumption exceeds investment and there is a sizable adjustment cost of investment.     

Dynamic employment adjustments over business cycles

This paper uses U.S. monthly industrial production employment data between 1964 and 2000 to examine the dynamic labor adjustments of production workers and nonproduction workers in both the short and long-run. The results from the short-run analysis show that the dynamic adjustment of production workers is consistent with business cycles. However, the adjustment of nonproduction workers is relatively fixed, lags behind the shocks over business cycle changes, and exhibits the quasi-fixed factor property. In the long-run, we found that nonproduction workers and production workers are cointegrated indicating that the two series are in long-run equilibrium.First version received: March 2002/Final version received: November 2003We would like to thank James McClure, participants in the Economics Department seminar series at Ball State University, and an anonymous referee for their comments and suggestions.     

Taxation and political business cycles in EU economies

This paper examines whether incumbent national governments of 11 member states of the European Union manipulated the tax policy instruments at their disposal in order to create national political business cycles, opportunistic or partisan. The empirical evidence, based on data concerning the 1965 to 1997 period, does not support this hypothesis. Rather, it appears that governments have pursued stabilization policies.     

Endogenous business cycles and systematic stabilization policy*

We study the effects of fiscal policy rules on the determinacy of rational expectations equilibrium in a perfectly competitive monetary model with constant returns. Government spending implies a distortion of the monetary steady state due to the implied taxation. We show that policy rules that let the GNP share of government spending depend sufficiently negatively on increases in GNP stabilize the economy with respect to endogenous fluctuations for arbitrarily little distortion of the steady state at which stabilization occurs. The rules do not involve lump‐sum taxation, negative income taxation, or exact knowledge of the economy's laissez‐faire steady state.