Business Cycle Asymmetry Research Articles

Asymmetries in Risk Premia, Macroeconomic Uncertainty and Business Cycles

A large literature suggests that the expected equity risk premium is countercyclical. Using a variety of different measures for this risk premium, we document that it also exhibits growth asymmetry, i.e. the risk premium rises sharply in recessions and declines much more gradually during the following recoveries. We show that a model with recursive preferences, in which agents cannot perfectly observe the state of current productivity, can generate the observed asymmetry in the risk premium. Key for this result are endogenous fluctuations in uncertainty which induce procyclical variations in agent's nowcast accuracy. In addition to matching moments of the risk premium, the model is also successful in generating the growth asymmetry in macroeconomic aggregates observed in the data, and in matching the cyclical relation between quantities and the risk premium.

Unit Root Testing in Multiple Smooth Break Models with Nonlinear Dynamics

This work builds a flexible model accommodating nonlinear dynamics around a trend function with multiple (up to m) gradual shifts. Such a model is suitable for capturing the behavior of many post World War II economic time‐series subject to the onset of external causes such as oil crises, financial crises, technology changes and regulatory changes. Deriving unit root tests in this nonlinear model is of particular interest. In fact, the options of a general trend specification and nonlinear dynamics are critical to remedy unit root tests not being biased toward a non‐rejection of a unit root hypothesis and prevents the first‐differences of a series from being used too often. An asymptotic theory for the unit root tests is also established. The unit root tests are applied to G7 industrial production series, and evidence in favor of nonlinear trend ‘stationary’ models is found in a majority of the cases. The merits of the new model are further demonstrated in an estimation exercise for the US industrial production series, and evidence of four gradual shifts in the trend, different growth patterns for different periods, and business cycle asymmetries is found.

EAGLE-FLI: A macroeconomic model of banking and financial interdependence in the euro area

We incorporate financial linkages in EAGLE, a New Keynesian multi-country dynamic general equilibrium model of the euro area (EA) by including financial frictions and country-specific banking sectors. In this new version, termed EAGLE-FLI (Euro Area and GLobal Economy with Financial LInkages), banks collect deposits from domestic households and cross-country inter-bank market and raise capital to finance loans issued to domestic households and firms. In order to borrow from local (regional) banks, households use domestic real estate whereas firms use both domestic real estate and physical capital as collateral. These features – together with the full characterization of trade balance and real exchange rate dynamics and with a rich array of financial shocks – allow to properly assessing domestic and cross-country macroeconomic effects of financial shocks. Our results support the views that (1) the business cycles in the EA can be driven not only by real shocks, but also by financial shocks, (2) the financial sector could amplify the transmission of (real) shocks, and (3) the financial/banking shocks and the banking sectors can be sources of business cycle asymmetries and spillovers across countries in a monetary union.

Leverage and Deepening Business Cycle Skewness

We document that the U.S. and other G7 economies have been characterized by an increasingly negative business cycle asymmetry over the last three decades. This finding can be explained by the concurrent increase in the financial leverage of households and firms. To support this view, we devise and estimate a dynamic general equilibrium model with collateralized borrowing and occasionally binding credit constraints. Improved access to credit increases the likelihood that financial constraints become non-binding in the face of expansionary shocks, allowing agents to freely substitute intertemporally. Contractionary shocks, on the other hand, are further amplified by drops in collateral values, since constraints remain binding. As a result, booms become progressively smoother and more prolonged than busts. Finally, in line with recent empirical evidence, financially-driven expansions lead to deeper contractions, as compared with equally-sized non-financial expansions.

Leverage and Deepening Business-Cycle Skewness

We document that the United States and other G7 economies have been characterized by an increasingly negative business-cycle asymmetry over the last three decades. This finding can be explained by the concurrent increase in the financial leverage of households and firms. To support this view, we devise and estimate a dynamic general equilibrium model with collateralized borrowing and occasionally binding credit constraints. Improved access to credit increases the likelihood that financial constraints become nonbinding in the face of expansionary shocks, allowing agents to freely substitute inter-temporally. Contractionary shocks, however, are further amplified by drops in collateral values, since constraints remain binding. As a result, booms become progressively smoother and more prolonged than busts. Finally, in line with recent empirical evidence, financially driven expansions lead to deeper contractions, as compared with equally sized nonfinancial expansions. (JEL D14, E23, E32, E44)

Beveridge-Nelson decomposition with Markov switching

This paper considers Beveridge-Nelson decomposition in a context where the permanent and transitory components both follow a Markov switching process. Our approach incorporates Markov switching into a single source of error state-space framework, allowing business cycle asymmetries and regime switches in the long-run multiplier.

US Interest Rate Policy Spillover and International Capital Flow: Evidence from Korea

This study empirically investigates the spillover effect of the US Fed’s monetary policy on the international capital flow in South Korea. Novel high frequency data from the EPFR Global and the event study strategy allow us to identify the Fed’s policy shock with minimal assumptions. In contrast to the conventional wisdom, our identification strategy finds that contemporary cross-border equity flows increase upon a (more-than-expected) contractionary interest rate policy during the event week. This result is robust to exclusion of influential observations, alternative estimation methods as well as inclusion of an additional explanatory variable which explicitly controls for possible endogeneity. When the business cycle asymmetry is taken into account, our simplistic model explains the variation in the active equity flow up to 72%. International bond investors also respond positively to the Fed policy surprise, in one week prior to the policy event. The effect of the US policy shock does not last longer than a week’s time after the initial impact for both equity and bond flows. Finally, we replicate the negative estimators found in the literature using full sample regressions. This result indirectly show that differences in results are potentially attributed to the difference in identification methodologies, not the data. Our findings suggest that the implicit identification assumptions in conventional empirical capital flow literature need further investigations.

Leverage and Deepening Business Cycle Skewness

We document that the U.S. economy has been characterized by an increasingly negative business cycle asymmetry over the last three decades. This finding can be explained by the concurrent increase in the financial leverage of households and firms. To support this view, we devise and estimate a dynamic general equilibrium model with collateralized borrowing and occasionally binding credit constraints. Higher leverage increases the likelihood that constraints become slack in the face of expansionary shocks, while contractionary shocks are further amplified due to binding constraints. As a result, booms become progressively smoother and more prolonged than busts. We are therefore able to reconcile a more negatively skewed business cycle with the Great Moderation in cyclical volatility. Finally, in line with recent empirical evidence, financially-driven expansions lead to deeper contractions, as compared with equally-sized non-financial expansions.

Business Cycle Asymmetries and Nonlinearity in UAE Macroeconomic Time Series

This study investigates the dynamic behaviour of macroeconomic time series variables of the United Arab Emirates. We first examined whether there are non‐Gaussian characteristics associated with the macroeconomic variables of the United Arab Emirates. Through application of the BDS nonlinearity test, our results indicated that there is a substantial nonlinear dependence in the data set for all the variables. We also assessed the asymmetric behaviour of these variables by exploring whether they exhibit two particular forms of asymmetry, which are deepness and steepness asymmetries. These results have shown that there is no empirical evidence of business cycle asymmetry in all the variables at any conventional level of significance in the sample period. Also, through application of further robust testing, our findings indicate the presence of pro‐cyclical asymmetry in some of the variables and at the same time indicate the presence of asymmetries in the volatility.

Testing for Symmetry in Weakly Dependent Time Series

I propose a test of symmetry for a stationary time series based on the difference between the dispersion above the central tendency of the series with that below it. The test has many attractive features: it is applicable to dependent processes, it has a familiar form, it can be implemented using regression, and it has a standard Gaussian limiting distribution under the null of symmetry. The finite sample properties of the test are examined via Monte Carlo simulation and suggest that it is more powerful than competing tests in the literature for the DGPs considered. I apply the test to investigate business cycle asymmetry in sectoral data and confirm previous findings that asymmetry is more often detected in goods-producing sectors than service-related sectors.

Is Business Cycle Asymmetry Intrinsic in Industrialized Economies?

We consider a model-averaged forecast-based estimate of the output gap to measure economic slack for ten industrialized economies. Our measure takes changes in the long-run growth rate into account and, by accounting for model uncertainty using equal weights on different forecast-based estimates, is robust to different assumptions about the underlying structure of the economy. For each country, we find that the estimated output gap is highly asymmetric, with much larger negative movements during recessions than positive movements in expansions, suggesting that this particular form of business cycle asymmetry is an intrinsic characteristic of industrialized economies. Furthermore, the estimated output gap is strongly negatively correlated with future output growth and unemployment and positively correlated with capacity utilization in each case. It also implies a convex Phillips Curve in many cases.

Rationality of Announcements, Business Cycle Asymmetry, and Predictabilityof Revisions. The Case of French GDP

We analyze French GDP revisions and we investigate the rationality of preliminary announcements of GDP. We consider nonlinearities, taking the form of business cycle asymmetry and time changes, and their effect on both unconditional moments of revisions and the rationality of announcements. We find that nonlinearity represents an interesting feature of French GDP announcements and revisions. Our results suggest that revisions are unbiased, but announcements are overall inefficient, conditionally on a set of macro-financial indicators. Finally, we investigate the forecastability of GDP revisions in real-time and we find out that total revisions are predictable.

Gold returns: Do business cycle asymmetries matter? Evidence from an international country sample

This paper investigates the link between business cycle asymmetries and gold price dynamics across an international country sample. The empirical effort employs oil, consumer prices and a set of macroeconomic data from the G7 economies, as well as the major international gold producers, spanning the period 1980 to 2015. Using an asymmetric business cycle model, the empirical findings document that business cycles asymmetrically affect gold returns, while these returns respond stronger during the recessionary than booming phases of the cycle.

Business Cycle Asymmetries and the Labor Market

This paper shows that the matching function and the Beveridge curve in the United States exhibit strong nonlinearities over the business cycle. These patterns can be replicated by enhancing a search and matching model with idiosyncratic productivity shocks for new contacts. Large negative aggregate shocks move the hiring cutoff point into a part of the idiosyncratic density function with higher density and thereby generate large, asymmetric job-finding rate and unemployment reactions. Our proposed mechanism is of high relevance as it leads to time varying effects of certain policy interventions.

Business Cycle Asymmetries and the Labor Market

This paper shows that the matching function and the Beveridge curve in the United States exhibit strong nonlinearities over the business cycle. These patterns can be replicated by enhancing a search and matching model with idiosyncratic productivity shocks for new contacts. Large negative aggregate shocks move the hiring cutoff point into a part of the idiosyncratic density function with higher density and thereby generate large, asymmetric job-finding rate and unemployment reactions. Our proposed mechanism is of high relevance as it leads to time varying effects of certain policy interventions.

EAGLE-FLI. A Macroeconomic Model of Banking and Financial Interdependence in the Euro Area

We incorporate financial linkages in EAGLE, a New Keynesian multi-country dynamic general equilibrium model of the euro area (EA) by including financial frictions and country-specific banking sectors. In this new version of the model, termed EAGLE-FLI (Euro Area and Global Economy with Financial Linkages), banks collect deposits from domestic households and cross-country interbank market and raise capital to finance loans issued to domestic households and firms. In order to borrow from local (regional) banks, households use domestic real estate as collateral whereas firms use both domestic real estate and physical capital. These features – together with the full characterization of trade balance and real exchange rate dynamics and with a rich array of financial shocks – allow to properly assess domestic and cross-country macroeconomic effects of financial shocks. Our results support the views that (1) the business cycles in the EA can be driven not only by real shocks, but also by financial shocks, (2) the financial sector can amplify the transmission of (real) shocks, and (3) the financial/banking shocks and the banking sectors can be sources of business cycle asymmetries and spillovers across countries in a monetary union.

EAGLE-FLI: A Macroeconomic Model of Banking and Financial Interdependence in the Euro Area

We incorporate financial linkages in EAGLE, a New Keynesian multi-country dynamic general equilibrium model of the euro area (EA) by including financial frictions and country-specific banking sectors. In this new version of the model, termed EAGLE-FLI (Euro Area and GLobal Economy with Financial LInkages), banks collect deposits from domestic households and cross-country interbank market and raise capital to finance loans issued to domestic households and firms. In order to borrow from local (regional) banks, households use domestic real estate as collateral whereas firms use both domestic real estate and physical capital. These features - together with the full characterization of trade balance and real exchange rate dynamics and with a rich array of financial shocks - allow to properly assess domestic and cross-country macroeconomic effects of financial shocks. Our results support the views that (1) the business cycles in the EA can be driven not only by real shocks, but also by financial shocks, (2) the financial sector could amplify the transmission of (real) shocks, and (3) the financial/banking shocks and the banking sectors can be sources of business cycle asymmetries and spillovers across countries in a monetary union.

On business cycle fluctuations in USA macroeconomic time series

This study employs eighteen USA macroeconomic time series variables to investigate possible existence of asymmetries in business cycle fluctuations in the series. Detection of asymmetric fluctuations in economic activity is important for policymakers since effective monetary policy relies on asymmetric business cycle fluctuations in all the series. The asymmetric deviations from the long-term growth trend in each of the series are modeled using regime switching models and artificial neural networks. The results based on nonlinear switching time series models reveal strong evidence of business cycle asymmetries in most of the series. The results based on in-sample approximations from artificial neural networks show statistically significant evidence of asymmetries in all the series. Similar results are obtained when jackknife out-of-sample approximations from artificial neural networks are used. Thus, the study results show statistically significant evidence of asymmetries in all the series which indicates that business cycle fluctuations in the series are asymmetric, thus alike. Therefore, the impact of monetary policy shocks on the output and the other macroeconomic variables can be anticipated using nonlinear models only. The results on asymmetric business cycle fluctuations in real GDP are in line with recent studies but in sharp contrast with Balke and Fomby (1994).

Assessing the regional business cycle asymmetry in a multi-level structure framework: a study of the top 20 US MSAs

Dating the regional business cycle phases using a multi-level Markov-switching model revealed that the regional cycle phase transition probability depends on the national cycle phase, although the propagation speed of the national phase into a regional cycle varies across the regions. The estimation of the national factor loadings on regional economies showed that the response of a regional economy to a national impact is mostly greater during a national contraction phase.

Credit market imperfections and business cycle asymmetries in Turkey

The credit market imperfections have important consequences for aggregate cycles, especially for developing countries. The research on the relationship between imperfections and output dynamics at the macro-level is ample, but the lack of wide coverage micro-data sets for developing countries limits the study of aggregate implications of the micro-level capital market imperfections. This paper presents micro-evidence on the credit market imperfections in Turkey and connects these imperfections to macro-movements. The first part of the paper documents the aggregate boom–bust cycles in Turkey and shows that the non-tradable sector is more volatile over the business cycle than the tradable sector. Additionally, this sector based asymmetry is found to be strongly correlated with aggregate credit movements. To establish the connection between the sector based asymmetries and the credit markets further, the second part of the paper constructs two micro-data sets. Using structural estimation, we find that the non-tradable sector is financially more constrained than the tradable sector. With the non-tradable sector being more constrained, credit movements become an important determinant of boom–bust cycles. Therefore, we can establish that the asymmetry in the financial constraints of the different sectors at the micro-level can generate the observed asymmetrical aggregate response of sectors over the business cycle.