Business Cycle Analysis Research Articles

Obtaining Clear and Timely Business Cycle Turning Point Signals With a Composite Leading Business Cycle Indicator

The upward phase of the South African business cycle that followed the global financial crisis gradually lost momentum from 2012 onwards, resulting in a peak in the business cycle being reached in November 2013. The subsequent downward phase has so far lasted for 48 months, up to November 2017. The gradual loss of momentum in domestic output growth was not widely recognised by many economists, judging by consensus forecasts of annual GDP growth. However, the South African Reserve Bank (SARB) composite leading business cycle indicator reached a peak in February 2011 before trending gradually lower, suggesting a continued deterioration in output growth. The leading indicator reached a trough in April 2016, suggesting an imminent end to the downward phase of the business cycle, in line with consensus forecasts. However, output growth slowed further with the economy experiencing a technical recession. This paper employs the indicator approach to business cycle analysis in order to establish whether the current downward phase in the South African business cycle could reasonably have been predicted, and also whether the recent strong increase in the composite leading business cycle indicator provided a clear signal that the current downward phase might have ended. The results show that closer analysis of the leading indicator and its subcomponents would have revealed that a broad slowdown in the South African economy was underway since 2012. Also, the recent upward trend in the leading indicator did initially signal the end of the current downward phase in the business cycle in an unambiguous manner. However, the anticipated business cycle recovery appears to have been postponed by idiosyncratic exogenous factors.

Debunking the Myth of Southern Profligacy. A DSGE Analysis of Business Cycles in the EMU's Big Four

We investigate the drivers of EMU big fours' business cycles in a DSGE model. Our approach allows to disentangle the role of demand and technology shocks, where the latter may generate permanent consequences on national productivity levels. For the years before the financial crisis we cannot find evidence of a demand-driven boom in Spain and Italy relative to what happened in France and Germany. The aftermath of the sovereign bond crisis was characterized by a sequence of adverse permanent technology shocks both in Spain and in Italy. These latter results are consistent with recent theoretical developments that emphasize the adverse supply-side effects of a credit crunch.

Application of filters to analysis of business cycles and business cycle synchronization of Poland with European countries

The aim of this paper is to present the importance of business cycle synchronization between Poland and other European countries. The Hodrick- Prescott and Christiano-Fitzgerald filters were used in the research. They were applied to extract cyclical components from quarterly time series of real GDP of 33 European countries basing on the Eurostat’s quarterly data on nominal GDP and price level in the years 2002—2016. The application of filters proved that, in case of some countries (e.g. Greece), the economic crisis led not only to a drop of GDP but also to a break in the trend. Moreover, the results indicate that most European countries overcame the crisis at the end of 2015. The business cycle synchronization of Poland with euro area countries is slowly increasing.

Are Small-Scale SVARs Useful for Business Cycle Analysis? Revisiting Nonfundamentalness

Nonfundamentalness arises when current and past values of the observables do not contain enough information to recover structural vector autoregressive (SVAR) disturbances. Using Granger causality tests, the literature suggested that several small-scale SVAR models are nonfundamental and thus not necessarily useful for business cycle analysis. We show that causality tests are problematic when SVAR variables cross-sectionally aggregate the variables of the underlying economy or proxy for nonobservables. We provide an alternative testing procedure, illustrate its properties with Monte Carlo simulations, and re-examine a prototypical small-scale SVAR model.

How Capitalism Destroyed Itself: Technology Displaced by Financial Innovation by William Kingston (review)

Liam Murphy has written a fascinating and thought-provoking biography with clarity, scholarly integrity and panache! Dr Declan M Downey lectures in early modern diplomatic history and co-directs the BCL law with history degree at University College Dublin. He was elected a fellow of the Royal Academy of History, Madrid, in 2009. How Capitalism Destroyed Itself: Technology Displaced by Financial Innovation, William Kingston (Cheltenham, UK; Northampton, MA: Edward Elgar, 2017), 174 pages. The argument of this book is clear, persuasive and frightening. The premises and steps of the argument are as follows: (1) Capitalism has been hugely significant in the generation of wealth that has allowed many millions more people to live decent lives for longer. (2) At the heart of the creativity of capitalism has been the paired achievement of securing independent property rights and ensuring through legislation that property rights are exercised for the public good. (3) Constrained property rights facilitated a series of technological innovations which contributed to wealth creation. (4) Propertied interests have succeeded in capturing the law-making powers of government and have freed property from the constraints that obligated it to serve the public good. (5) This law-making power has been used to extend to the holders and generators of moneythesamerightsaccordedtheholdersandgeneratorsofothercommodities. (6) Consequently, the investment in technological innovation which might have saved capitalism has instead been diverted to financial innovation. (7) The consequences of these changes have been growing inequality, the crises of the banking and credit systems, austerity politics and the popular revolt of voters and tax payers. The conclusion drawn is that our democratic regimes are caught in a bind from which there seems to be no escape. They are in hock to the financial interests that fund parties and candidates, and at the same time they depend on popular support that they attempt to purchase with the promise of transfers in benefits and welfare payments. Each step of the argument is supported by referenced literature, but one author in particular provides inspiration and shape to the argument. Joseph Schumpeter’s analysis of business cycles and of the stages in economic Studies • volume 106 • number 423 381 Autumn 2017: Book Reviews development structures the history of capitalism as it is told in the first two chapters of Kingston’s book. Schumpeter’s suggested stages are shown to have support in other accounts in the literature. More critical for the argument of the book, however, is Schumpeter’s prognosis that the capitalist system was bound to self-destruct as it shifted towards a socialist type system of welfare provision via transfers. To an extent, the book reads like a vindication of Schumpeter, whose ideas have long been disregarded and even ridiculed by those who celebrated the triumph of the western liberal system over communism with the disintegration of the Soviet Union in the years following 1989. The celebration may have been premature. After all, Schumpeter did not predict the failure of one system and the success of the other. Rather, he pointed to dynamics within capitalism that were changing its very nature from within, and leading it to self-destruction. There are some similarities with Marx’s prediction of capitalism’s selfdestruction , but Schumpeter does not rely on the same economic analysis as Marx. The labour theory of value (with labour as the exclusive source of surplus value), the declining rate of profit as labour is replaced with machines and the tightening competition for credit among entrepreneurs are not elements of Schumpeter’s analysis. Instead, at least on Kingston’s reading, the focus is on the innovations which enabled the emergence and development of capitalism, and on the structural changes which have shifted government’s role to protecting the interests of those already benefiting from the existing generation and distribution of wealth, while blocking the sources of innovation that could deliver solutions and further development. The analysis is not a purely economic one but sees the role of cultures, ideas, and politics as intrinsically linked with that of economics. The contrast with a crude version of Marx is noted: ideas, for example, stand alone as sources of energy and are not simply the by-products of productive activity. Kingston’s emphasis...

From the Business Cycle to the Output Cycle: Predicting South African Economic Activity

Substantial literature exists on the ability of various economic variables to predict the turning points of the business cycle. However, comparatively little attention has been paid to predicting turning points in other measures of economic activity, such as the output gap or output cycle. This paper argues that the analysis of business cycles can be supplemented by the behaviour of output cycles, and that turning points in the output cycle presents a complementary source of information relative to the business cycle. The paper derives an output cycle series for the South African economy and compares this series to the business cycle series, as formally constructed and published by the South African Reserve Bank. It then estimates a number of probability models to determine the extent to which two market-determined and readily observable economic variables can predict turning points in the output cycle. This includes the use of currency in circulation as an additional predictor of economic activity, which is found to be a very accurate and useful predictor.

Reflexões sobre sincronização dos ciclos económicos no Mercosul e na Zona Euro

A sincronização dos ciclos económicos é uma das condições necessárias para um adequado funcionamento de uma zona monetária1. Aquando da adesão dos países membros da União Europeia à Zona Euro houve alguma preocupação com este aspeto. No caso do Mercosul, a inexistência de uma moeda única tem permitido uma superior flexibilidade às políticas monetárias e orçamentais dos países integrados, tudo isto podendo contribuir para uma maior sincronização (natural) dos ciclos económicos. Assim, é nosso objetivo proceder a uma análise de sincronização dos ciclos económicos no Mercosul e na Zona Euro, de forma a verificar se o facto de existir, ou não, uma moeda comum contribui para uma maior (resp. menor) sincronização dos ciclos económicos.

Spectral Analysis Of Business Cycles In The Visegrad Group Countries

This paper examines the business cycle properties of Visegrad group countries. The main objective is to identify business cycles in these countries and to study the relationships between them. The author applies a modification of the Fourier analysis to estimate cycle amplitudes and frequencies. This allows for a more precise estimation of cycle characteristics than the traditional approach. The cross-spectral analysis of GDP cyclical components for the Czech Republic, Hungary, Poland and Slovakia makes it possible to assess the degree of business cycle synchronization between the countries.

An endogenously clustered factor approach to international business cycles

SummaryFactor models have become useful tools for studying international business cycles. Block factor models can be especially useful as the zero restrictions on the loadings of some factors may provide some economic interpretation of the factors. These models, however, require the econometrician to predefine the blocks, leading to potential misspecification. In Monte Carlo experiments, we show that even a small misspecification can lead to substantial declines in fit. We propose an alternative model in which the blocks are chosen endogenously. The model is estimated in a Bayesian framework using a hierarchical prior, which allows us to incorporate series‐level covariates that may influence and explain how the series are grouped. Using international business cycle data, we find our country clusters differ in important ways from those identified by geography alone. In particular, we find that similarities in institutions (e.g., legal systems, language diversity) may be just as important as physical proximity for analyzing business cycle comovements.

Metropolitan Business Cycle Analysis for Lubbock

Abstract. This study develops a business cycle index (BCI) for Lubbock Metropolitan Statistical Area (MSA). The Stock & Watson ( 1989 ; 1991 ; 1993 ) methodology is used to develop the BCI and assumes that the co-movements of key economic indicators have a single underlying, unobservable factor. This factor is extracted from the indicators and used to calculate an index that represents economic conditions through an econometric approach. The model uses the Kalman filter smoothing approach which smooths across variables and over time. This results in an index that is smoother with less pronounced expansions and recessions. Indicator series used for the study are: establishment employment, unemployment, real retail sales and real wages that begin in 1990 and include complete data through the end of 2015. Results indicate that the Lubbock business cycle has peaks and troughs that occur later than those for the national economy. Keywords. Regional Economics; Business Cycles; Economic Indicators. JEL. R15, E32.

Extracting Business Cycles using Semi-Parametric Time-Varying Spectra with Applications to US Macroeconomic Time Series

A growing number of empirical studies provides evidence that dynamic properties of macroeconomic time series have been changing over time. Model-based procedures for the measurement of business cycles should therefore allow model parameters to adapt over time. In this paper the time dependencies of parameters are implied by a time dependent sample spectrum. Explicit model specifications for the parameters are therefore not required. Parameter estimation is carried out in the frequency domain by maximising the spectral likelihood function. The time dependent spectrum is specified as a semi-parametric smoothing spline ANOVA function that can be formulated in state space form. Since the resulting spectral likelihood function is time-varying, model parameter estimates become time-varying as well. This new and simple approach to business cycle extraction includes bootstrap procedures for the computation of confidence intervals and real-time procedures for the forecasting of the spectrum and the business cycle. We illustrate the methodology by presenting a complete business cycle analysis for two U.S. macroeconomic time series. The empirical results are promising and provide significant evidence for the great moderation of the U.S. business cycle.

Book Review: Marx’s Associated Mode of Production: A Critique of Marxism by Paresh Chattopadhyay

Paresh Chattopadhyay Marx's Associated Mode of Production: A Critique of Marxism, New York: Palgrave Macmillan, 2016; 259 pp.: ISBN 1137579714, 89.50 [pounds sterling] This book, comprising 12 chapters, concerns Marx's idea of human emancipation focusing on labouring people's self-emancipation towards a post-capitalist 'associated mode of production'. As the author points out, in the current conditions of an exacerbated planetary crisis and a growing social and environmental degradation, this emancipatory idea is more relevant than ever before (p. 1). As highlighted in the introductory chapter, 'the idea of human emancipation ... is an abiding message in Marx's writings almost from the beginning of his adult life' (p. 12). Following Marx's (and Engels') work, the author stresses that socialist revolution is not a momentary event, but rather an epochal transformation activated by proletarian struggles over a long period transforming both circumstances and people themselves (p. 6). Contrary to the standard position of the so-called 'twentieth century socialism' (TCS), he also notes that 'just as state is non-existent in Marxian socialism, in the same way, Party is also totally irrelevant in socialism as conceived by Marx and Engels' (p. 7), and that 'there is absolutely no text in Marx's published work where even the slightest mention of this strange figure makes its appearance in a discussion on socialism/communism' (p. 7). Consistent with his previous work, the author characterises these (TCS) regimes as 'state capitalism' (pp. 7, 225), assessing plausibly that 'Marx's socialism has not yet even been tried' (p. 12). In Chapters 2 and 3, the author explores Marx's research practice, leading to a great number of notebooks, from which one can draw valuable insights. Against a notorious ideological reading of the work of Marx and Engels in the past, he pledges for a scientific rather than ideological reading (pp. 52-53), and his is indeed a faithful and yet critical/ non-dogmatic reading of Marx's work. In a brief portrait of post-capitalist society, presented in Chapters 4 and 5, he states that Marx's associated mode of production 'excludes, by definition, state, private ownership of the conditions of production, commodity production, and wage labour' (p. 59). Chapter 6 deals with some feminist critiques of Marx, an alleged 'patriarchal bias', a bias of his value theory as ignoring a gendered division of labour, and the claim that domestic labour is (unfairly) characterised by Marx as unproductive. The author presents sufficient textual evidence from Marx's work to refute such claims or critiques. Chapter 7, concerning the 'Global reach of capital', analyses the spatial expansion of capital, inherent in the capital relation itself. The formation of world market and the role of trade in the global accumulation of capital are more specifically analysed. As pointed out, Marx's treatment of the credit mechanism and the role of money are particularly relevant for analysing the current 'neoliberal' phase of capitalism and the dominant destabilising role of finance capital. In Chapter 8, the author examines Marx's contributions concerning the theory of crisis. Starting with the idea in the Communist Manifesto that the contradiction between the productive forces and the existing capitalist relations is the root cause of crisis, it is further noted that the limits to capitalist production are set by the potential profitability for the capitalist, rather than by the needs of producers. While, for Marx, the possibility of crisis lies in commodity-production itself, its necessity has to do with the fact that, in the process of accumulation, technological progress implies a diminution of the necessary labour time, resulting in an increased mass of surplus appropriation but a decline in the rate of profit (pp. 119-120). As argued, it is the relevance of Marx's treatment of crisis and his analysis of business cycles that explains the Marxian influence on some contemporary (Minskian and post-Keynesian) approaches. …

Monetary policy and leverage shocks

The current mainstream approach to monetary policy in the United States is based on the new Keynesian model and is expressed in terms of the federal funds rate. It ignores the role of financial intermediary leverage (or collateral rates). But as the federal funds rate has reached the zero lower bound, the issue is whether there is a useful role of leverage in monetary policy and business cycle analysis. Motivated by these considerations and by recent financial intermediary asset pricing theories in this paper, we investigate the macroeconomic effects of broker–dealer leverage and the interdependence between monetary policy and broker–dealer leverage in the context of a structural vector autoregression model, using quarterly U.S. data over the period from 1967:1 to 2014:3. We address the simultaneity problem of identifying monetary policy and leverage shocks by using a combination of short-run and long-run restrictions. We also use the sign restriction approach to the identification of shocks to distinguish between leverage supply and leverage demand shocks, as one would expect the macroeconomic effects of these two types of leverage shocks to be quite different. Our results show that monetary policy and broker–dealer leverage demand shocks produce results that capture reasonable macroeconomic dynamics.

An empirical analysis of Indian business cycle dynamics

This paper attempts to construct a monthly Composite Index of Leading Indicators (CILI) for the Indian business cycle between April 1994 and December 2015. The cyclical component of the Index of Industrial Production (IIP), generated by Baxter-King band pass filters, is considered as a reference series for Indian business cycle analysis. A set of indicator variables pertaining to different sectors of the economy are chosen on the basis of their strong leading correlation with the reference series. Further, Principal Component Analysis (PCA) technique is applied to assign an appropriate weight to each leading variable, and a CILI is constructed. The performance of the CILI is validated using the turning-point analysis of BryBoschan and Harding-Pagan. The CILI accurately predicts two major troughs in the Indian business cycle, with six and eleven month leads respectively.

Das House-Kapital: A Long Term Housing & Macro Model

There are, by now, several long term, time series data sets on important housing & macro variables, such as land prices, house prices, and the housing wealth-to-income ratio. However, an appropriate theory that can be employed to think about such data and associated research questions has been lacking. We present a new housing & macro model that is designed specifically to analyze the long term. As an illustrative application, we demonstrate that the calibrated model replicates, with remarkable accuracy, the historical evolution of housing wealth (relative to income) after World War II and suggests a further considerable increase in the future. The model also accounts for the close connection of house prices to land prices in the data. We also compare our framework to the canonical housing & macro model, typically employed to analyze business cycles, and highlight the main differences.

Monetary Policy and Leverage Shocks

The current mainstream approach to monetary policy in the United States is based on the new Keynesian model and is expressed in terms of the federal funds rate. It ignores the role of financial intermediary leverage (or collateral rates). But as the federal funds rate has reached the zero lower bound, the issue is whether there is a useful role of leverage in monetary policy and business cycle analysis. Motivated by these considerations and by recent financial intermediary asset pricing theories, in this paper we investigate the macroeconomic effects of broker-dealer leverage and the interdependence between monetary policy and broker-dealer leverage in the context of a structural vector autoregression model, using quarterly U.S. data over the period from 1967:1 to 2014:3. We address the simultaneity problem of identifying monetary policy and leverage shocks by using a combination of short-run and long-run restrictions. We also use the sign restrictions approach to the identification of shocks to distinguish between leverage supply and leverage demand shocks, as one would expect the macroeconomic effects of these two types of leverage shocks to be quite different. Our results show that monetary policy and broker-dealer leverage demand shocks produce results that capture reasonable macroeconomic dynamics.

The Business Economist’s Toolkit

Business economists are not members of the high church of academic orthodoxy. Our tool kit includes research functions, such as business cycle analysis, demographics research, data analytics, primary research, diversity of thought, and client research. It also includes personal skills that should be cultivated and practiced, such as curiosity, maintaining a nonpartisan view, humility, courage, and effective communication.

The Risk-Adjusted Monetary Policy Rule

Macroeconomists are increasingly using nonlinear models to account for the effects of risk in the analysis of business cycles. In the monetary business cycle models widely used at central banks, an explicit recognition of risk generates a wedge between the inflation-target parameter in the monetary policy rule and the risky steady state (RSS) of inflation---the rate to which inflation will eventually converge---which can be undesirable in some practical applications. We propose a simple modification to the standard monetary policy rule to eliminate the wedge. In the proposed risk-adjusted policy rule, the intercept of the rule is modified so that the RSS of inflation equals the inflation-target parameter in the policy rule.

Trend estimation of multivariate time series with controlled smoothness

ABSTRACTThis paper extends the univariate time series smoothing approach provided by penalized least squares to a multivariate setting, thus allowing for joint estimation of several time series trends. The theoretical results are valid for the general multivariate case, but particular emphasis is placed on the bivariate situation from an applied point of view. The proposal is based on a vector signal-plus-noise representation of the observed data that requires the first two sample moments and specifying only one smoothing constant. A measure of the amount of smoothness of an estimated trend is introduced so that an analyst can set in advance a desired percentage of smoothness to be achieved by the trend estimate. The required smoothing constant is determined by the chosen percentage of smoothness. Closed form expressions for the smoothed estimated vector and its variance-covariance matrix are derived from a straightforward application of generalized least squares, thus providing best linear unbiased estimates for the trends. A detailed algorithm applicable for estimating bivariate time series trends is also presented and justified. The theoretical results are supported by a simulation study and two real applications. One corresponds to Mexican and US macroeconomic data within the context of business cycle analysis, and the other one to environmental data pertaining to a monitored site in Scotland.

Emissions cap or emissions tax? A multi-sector business cycle analysis

We develop a multi-sector business cycle model to analyze stochastic implications of reducing CO2 emissions with carbon permits or with carbon taxes in the presence of multiple sources of macroeconomic uncertainty. The model is calibrated to reflect the U.S. experience. As in previous studies, using a single-sector version of our model, we find that the cap regime generates lower volatility of real variables than the tax regime, but the latter may be preferable from the welfare perspective. Still, our multi-sector analysis points to the importance of the origin of the shocks in the ranking of the two instruments and to the desirability of going beyond a single-sector analysis in evaluating their merits. We find no significant difference between the cap and the tax regimes when shocks come from non-energy sectors. In contrast, the cap has lower volatility but higher welfare costs than the tax for the shocks to energy production.