Bust Cycles Research Articles

Life and extinction of megafauna in the ice-age Arctic

Understanding the population dynamics of megafauna that inhabited the mammoth steppe provides insights into the causes of extinctions during both the terminal Pleistocene and today. Our study area is Alaska's North Slope, a place where humans were rare when these extinctions occurred. After developing a statistical approach to remove the age artifacts caused by radiocarbon calibration from a large series of dated megafaunal bones, we compare the temporal patterns of bone abundance with climate records. Megafaunal abundance tracked ice age climate, peaking during transitions from cold to warm periods. These results suggest that a defining characteristic of the mammoth steppe was its temporal instability and imply that regional extinctions followed by population reestablishment from distant refugia were characteristic features of ice-age biogeography at high latitudes. It follows that long-distance dispersal was crucial for the long-term persistence of megafaunal species living in the Arctic. Such dispersal was only possible when their rapidly shifting range lands were geographically interconnected. The end of the last ice age was fatally unique because the geographic ranges of arctic megafauna became permanently fragmented after stable, interglacial climate engendered the spread of peatlands at the same time that rising sea level severed former dispersal routes.

Natural resource revenue, spending strategies and economic growth in Niger

In this paper, we use a recursive dynamic computable general equilibrium (CGE) model to examine spending strategies in Niger, a resource-rich, low-income country that has a windfall gain from mineral export revenue. The recent literature on Dutch disease describes alternative policy rules to manage the income flow from the expected natural resource revenue, which can either be spent to raise immediate consumption or on public infrastructure to increase future productivity. We simulate four strategies. As a conservative strategy, Niger can spend only the interest earned on revenue in a sovereign wealth fund (bird-in-hand strategy); alternatively, it can borrow to spend now and repay with expected natural resource revenue. The key to the benefits of significant mineral revenue lies with the productivity and supply responses of spending. If significant output gain is assured, the different spending strategies have very similar effects on real consumption. Dutch disease, the overshooting of relative prices of non-tradable sector or the shrinking share of traded sectors in the economy, is also ameliorated with greater supply flexibility. Growth paths of alternative spending strategies differ markedly in timing and pattern, however, when spending does not raise productivity. The more aggressive spending plan may result in a boom–bust cycle if fiscal adjustments and debt repayments are necessary for any significant borrowing against future revenue and productivity gains are not realized.

Can a financial transaction tax prevent stock price booms?

We present a stock market model that quantitatively replicates the joint behavior of stock prices, trading volume and investor expectations. Stock prices in the model occasionally display belief-driven boom and bust cycles that delink asset prices from fundamentals and redistribute considerable amounts of wealth from less to more experienced investors. Although gains from trade arise only from subjective belief differences, introducing financial transactions taxes (FTTs) remains undesirable. While FTTs reduce the size and length of boom–bust cycles, they increase the likelihood of such cycles, thereby overall return volatility and wealth redistribution. Contingent FTTs, which are levied only above a certain price threshold, give rise to problems of equilibrium multiplicity and non-existence.

Endogenous Credit Booms and Busts: Learning in a Model of Consumer Default

During the Great Moderation, the consumer unsecured debt-to-income ratio nearly doubled and the personal bankruptcy filing rate more than quadrupled. This historically tranquil period ended in 2008 with a severe recession and a protracted credit crunch. We develop a theory of learning in which consumers and lenders adjust their beliefs about the riskiness of the economic environment over time in response to the realized sequence of aggregate shocks and then embed it into an otherwise standard quantitative model of consumer default. Simulations of the model suggest that learning can explain as much as half of the recent boom and bust cycle in consumer unsecured debt and a modest fraction of the rise in bankruptcy filings prior to 2005. In a policy experiment we find that macroprudential regulation via a pro-cyclical proportional tax levied on debt contracts may help to counteract the tendency of learning in our model to generate endogenous boom and bust cycles in consumer debt.

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.

Here today, gone tomorrow: declines and local extinctions of invasive ant populations in the absence of intervention

Invasive species are known to exhibit boom and bust cycles. We report population declines of one of the world’s most serious ant invaders, Anoplolepis gracilipes (Smith) (yellow crazy ant) in Arnhem Land, Australia. Anoplolepis gracilipes populations are known to fluctuate, both spatially and temporally, but this is the first instance of quantitative monitoring of spatial declines of entire populations. We present before and after survey data on seven populations that have either declined substantially or disappeared completely without human intervention. Sites ranged in size from 1.8 to 15 ha. Although the mechanistic cause of these declines remains unknown, A. gracilipes populations in Arnhem Land represent a unique opportunity to investigate mechanisms by which a globally significant invader declines, which could have important implications for invasive species management worldwide.

Expectation-Based Model Explaining Boom and Bust Cycles in Housing Markets

Expectation-Based Model Explaining Boom and Bust Cycles in Housing Markets

FDI, debt and capital controls

We examine the link between financial sector FDI flows, banking debt flows and capital controls in emerging market economies during episodes of large gross capital inflows – surges. We find that FDI surges in the financial sector behave remarkably similar to surges in banking debt flows: they are associated with boom–bust cycles in GDP and expansions of credit in foreign currency, unlike surges in FDI in the non-financial sectors. Moreover, global and contagion factors have a strong explanatory power in explaining surges in financial FDI and banking debt flows, compared to surges in non-financial sectors. But capital controls have the opposite effect on the two types of flows: restrictions on short-term debt flows tend to decrease the likelihood of surges in banking debt flows but increase the likelihood of surges in financial sector FDI.

Aging With Rising Risk: Have Older Households Experienced Faster-Growing Risk Exposure Than Younger Ones Since the 1990s?

Financial markets have been characterized by boom and bust cycles since the 1980s, while the responsibility for managing retirement wealth has increasingly shifted onto individual households at the same time. Policy makers and experts have expressed concern over rising risk exposure among older householders, who appear to be increasingly exposed to the growing financial risks just as they near retirement. We consider household data from the Federal Reserve’s Survey of Consumer Finances from 1989 to 2010 to analyze the correlation between age and risk exposure. We test whether older householders’ risk exposure has indeed grown over time, whether it has increased more than that of younger householders, whether changes in the demographic composition of older householders have contributed to older households’ rising risk exposure, and the degree to which increases in risk exposure can be traced to a growing concentration of household assets held in stocks and housing and to rising householder indebtedness. Our results indicate that risk exposure has grown more for older householders than for younger ones, that demographic changes among older householders have contributed to additional increases in older householders’ risk exposure, and that the growth of older householders’ risk exposure is driven more by rising risky asset concentration and less by greater indebtedness.

Technology Focus: Artificial Lift (July 2015)

Technology Focus I have been in the oil-extraction business for a long time, and I have seen more boom/ bust cycles than I care to remember. We have started another down cycle, but I have hopes that the rapid decline rate of horizontal wells will make it a short one. One thing this cycle has in common with all of the other down cycles the industry has been through is that most companies ignore the opportunities a down cycle presents. During a boom, companies tend to focus on how much they are making, not how much they are spending. If a USD 250,000 electrical submersible pump (ESP) fails after 30 days, it is just replaced, usually before anyone knows why it failed. The new one will pay out in a few days, and no one can tolerate deferring revenue. This amount also reflects a senior engineer’s salary and benefits for a year, but this can pass notice in a boom. Meanwhile, that senior engineer who should be looking at why the ESP lasted only 30 days is doing well to find time to turn in an approval-for-expenditure form for the replacement ESP. No one notices each instance, but it is not at all unusual for a horizontal well to see three or four artificial-lift installations the first few months of its life. No one who works in horizontal-well artificial lift can doubt that tens of millions, if not hundreds of millions, of dollars are wasted by industry in a boom. When a bust arrives (and it will arrive), it presents an opportunity to review those failures. It presents an opportunity to update (or maybe create) failure tracking databases and maybe get in a little training or go to a couple of conferences. It presents an opportunity to see what has and has not worked and, more importantly, to document what does and what does not work so that, when the next boom arrives (and it will arrive), you are prepared with trained personnel and best practices so that maybe you will not throw away quite so much money. Instead, what happens is that companies tend to see a zero-sum game (for this quarter). Employees sometimes are not viewed as assets. Companies do not see what their staff can save; they just see what they cost. So what happens? Corporate tells the divisions to reduce expenses by X. Local managers may see the value of their personnel and see the opportunities, but they no longer have the latitude to act accordingly. So now, when the next boom arrives, you are just as short-handed, you still do not know what does and does not work, and resources are still being squandered. I selected these papers because they were submitted by authors who somehow found the time to use their heads to increase production or reduce failure rates with what they had. They demonstrate what engineers can accomplish if they are allowed to function as engineers instead of project managers. JPT

Real and financial interacting markets: A behavioral macro-model

In the present paper we propose a model in which the real side of the economy, described via a Keynesian good market approach, interacts with the stock market with heterogeneous speculators, i.e., optimistic and pessimistic fundamentalists, that respectively overestimate and underestimate the reference value due to a belief bias. Agents may switch between optimism and pessimism according to which behavior is more profitable. To the best of our knowledge, this is the first contribution considering both real and financial interacting markets and an evolutionary selection process for which an analytical study is performed. Indeed, employing analytical and numerical tools, we detect the mechanisms and the channels through which the stability of the isolated real and financial sectors leads to instability for the two interacting markets. In order to perform such analysis, we introduce the “interaction degree approach”, which allows us to study the complete three-dimensional system by decomposing it into two subsystems, i.e., the isolated financial and real markets, easier to analyze, that are then linked through a parameter describing the interaction degree between the two markets. We derive the stability conditions both for the isolated markets and for the whole system with interacting markets. Next, we show how to apply the interaction degree approach to our model. Among the various scenarios we are led to analyze, the most interesting one is that in which the isolated markets are stable, but their interaction is destabilizing. We choose such setting to give an economic interpretation of the model and to explain the rationale for the emergence of boom and bust cycles. Finally, we add stochastic noises to the optimists and pessimists demands and show how the model is able to reproduce the stylized facts for the real output data in the US.

One strike, you're out: the residue of state deregulatory experiments and neoliberal era criminals in a faded Texas boomtown

Both the savings and loans (S&L) crisis of the late 1980s and the more recent subprime mortgage crisis left physical residues in the built landscape of American cities. With the crises, communities that had been the sites of speculative growth became sites of vacant properties, foreclosed properties, unimproved subdivisions, and razed structures. This paper considers the legacy of one such episode of urban development preceding the S&L crisis along Interstate 30 Garland, Texas, where criminals took advantage of deregulation and lax local planning policies to hastily construct a condominium glut. The central argument of the paper is that regional policies fostering outward growth coupled with federal policies stimulating extreme boom and bust cycles have created brief periods in which American Sunbelt communities experience growth pressures, which harnessed incorrectly have created the danger of a ‘one strike, you're out’ scenario: a single chance to succeed or fail.

Commodity Price Cycles and Financial Stability

Commodity exporter economies usually suffer when a boom in commodity prices ends, especially if the cycle ends abruptly. Furthermore, recent literature has highlighted the role of financial instability as either causing or aggravating financial and real crises. In this paper we look at these two aspects, and study the relationship between commodity prices, output growth and financial stability, the latter proxied by domestic credit growth. Given the asymmetry we observe in boom and bust cycles, we estimate the output cost of commodity price shocks on separate samples, with a special emphasis in emerging economies. In particular, we focus on the output cost of a commodity price reversal given the credit increase observed during a boom event. We find that, in line with previous literature, the correlation between commodity shocks and output growth decreases as economies are more open to financial markets. The novelty is that we also find that this correlation is higher when countries experience very rapid credit growth during the Upturn phase of a boom. That is, rapid credit growth -- regardless of its initial level -- exacerbates the cost of a commodity price reversal.

The Role of Speculation in Real Estate Cycles

Our study investigates the role of speculation in real estate cycles. We find that even a simple model of lagged supply response to price changes and speculation is sufficient to generate real estate cycles. Second, the volatility of prices – the biggest purported downside of “speculation” – is strongly related to supply conditions. Even more interestingly, the effect of speculation itself depends on supply conditions. Markets with more responsive regulatory environments, or less natural constraint (from physical geography), will experience less volatility as well as less behavior characterized as speculation. Demand conditions in general, and speculation in particular, can contribute to a boom and bust cycle in housing and real estate markets – but the effects of speculation appear to be dominated by the effect of the price elasticity of supply. In fact, the largest effects of speculation are only observed when supply is inelastic. Thus effective policies will focus on improving the efficiency of the supply of developable land, and real estate generally, including the development of an appropriate regulatory framework for real estate.

Can interest rate spreads stabilize the euro area?

Since the onset of the financial crisis significant interest rate spreads have arisen between euro area countries, both for public and private debt. We check whether these spreads could be made to work towards the goal of providing more stability to the euro area. In particular, we focus on reducing the imbalances that arose between the core and peripheral members of the euro area in the first decade of its existence. The idea is that stable positive spreads in peripheral countries could have decreased domestic demand, preventing the boom–bust cycles that plagued these economies. They could also prevent such developments in the future. We construct a panel model for euro area countries and estimate the relationship between real interest rates and the current account balance. Next, we use the estimated parameters to perform simulations. We find that spreads on real interest rates of 0.6–5.5 percentage points would have been necessary to stabilize external positions of the four peripheral euro area member countries.

Macroprudential Policies and Housing Prices: A New Database and Empirical Evidence for Central, Eastern, and Southeastern Europe

Several countries in Central, Eastern, and Southeastern Europe used a rich set of prudential instruments during the recent credit and housing boom and bust cycles. We construct a comprehensive database of these policy measures covering 16 countries at a quarterly frequency. We use this database to investigate whether the policy measures had an impact on housing price inflation. The measures that appeared to be effective were capital measures (minimum capital adequacy ratio, maximum ratio of lending to households to share capital) and nonstandard liquidity measures (marginal reserve requirements (MRRs) on foreign funding, MRRs linked to credit growth).

Explaining House Price Dynamics: Isolating the Role of Nonfundamentals

This paper examines the role of nonfundamentals‐based sentiment in house price dynamics, including the well‐documented volatility and persistence of house prices during booms and busts. To measure and isolate sentiment's effect, we employ survey‐based indicators that proxy for the sentiment of three major agents in housing markets: home buyers (demand side), home builders (supply side), and lenders (credit suppliers). After orthogonalizing each sentiment measure against a broad set of fundamental variables, we find strong and consistent evidence that the changing sentiment of all three sets of market participants predicts house price appreciation in subsequent quarters, above and beyond the impact of changes in lagged price changes, fundamentals, and market liquidity. More specifically, a one‐standard‐deviation shock to market sentiment is associated with a 32–57 basis point increase in real house price appreciation over the next two quarters. These price effects are large relative to the average real price appreciation of 71 basis points per quarter observed over the full sample period. Moreover, housing market sentiment and its effect on real house prices is highly persistent. The results also reveal that the dynamic relation between sentiment and house prices can create feedback effects that contribute to the persistence typically observed in house price movements during boom and bust cycles.

Building Stable Mortgage Markets: Lessons from Canada's Experience

The global financial crisis illustrated the high costs of boom–bust cycles in housing and mortgage markets and the importance of implementing policy frameworks that mitigate the risk of these events. This article discusses elements of Canada's policy framework that contributed to the relatively good performance of its mortgage market in recent years, including supervisory practices and mortgage underwriting standards. Lender recourse and the nondeductibility of mortgage interest payments played a complementary role. Ongoing policy challenges are also identified, including the need for monitoring to ensure the current prolonged period of low interest rates does not lead to levels of debt and house prices that create future instability in housing and mortgage markets.

Housing-bubble vulnerability and diversification opportunities during housing boom–bust cycles: evidence from decomposition of asset price returns

This paper examines the implications of housing-bubble vulnerability and time-varying risk management extracted from permanent–transitory ratios of asset price returns, which measure the relative importance of permanent and transitory shocks to asset markets. We extend the unobserved components model, which divides asset price returns into permanent and transitory components, to investigate the interrelations across housing assets, real estate investment trusts (REITs), and stocks in the USA. After 1984, which is the estimated break point in cross-asset interactions, many metropolitan statistical area-level housing markets display vulnerability to housing bubbles due to high permanent–transitory ratios, which suggests weak monetary policy effectiveness in stabilizing the housing boom–bust cycles. Households can diversify long-run risks by establishing stock–housing and REIT–stock portfolios after 1984, but they have fewer diversification opportunities in the post-1984 subperiod than in the pre-1984 subperiod.

Housing in Ireland: From Crisis to Crisis

In this paper we provide an overarching analysis of housing in Ireland from 1993-2014, examining trends in housing and land prices, supply and vacancy, social housing, private renting, mortgage debt and arrears, negative equity, and homelessness. The central thesis we advance is that housing in Ireland has been perpetually in crisis over the past twenty years, evolving through three distinct phases: 1993-2006 (the Celtic Tiger years); 2007-2012 (the crash); 2013- (unstable, uneven and partial rebalancing). The paper sets out the trends, policy and the multiple crises operating within each of these periods, illustrated through an extensive use of relevant data. The conclusion sets out why housing in Ireland evolved through these crises and examines what might be done to solve present issues and provide more robust housing policies that will be sustainable, equitable and ameliorate against future boom and bust cycles.