Cyclical Downturns Research Articles

Business Cycle Downturn Likelihood Estimation for Ciudad Juarez

A monthly frequency metropolitan business cycle downturn likelihood equation is estimated for Ciudad Juarez. The binary index of economic conditions is based upon monthly IMMEX export oriented manufacturing employment. A dynamic probit methodology is used for parameter estimation. Continuous explanatory variables include a 1-year minus 1-month Mexico interest rate spread, a 2015 = 100 weighted real exchange rate index, and a 10-year minus 3-month USA interest rate spread. Parameter estimation results confirm the various hypotheses examined. However, model simulation outcomes are less favorable with the results indicating that accurate forecasting of the post-2010 business cycles may require additional refinement to the index.

Global Economy: Moving from a Standardized to a Non-Standardized Development Model

The world economy has entered a new phase of its development — the destruction of the technological system created after the WWII. The purpose of the article is to argue that the destruction of the standardized economy is the main cause of the most acute problems of the world economy. The common features of standardized production and economy of scale are investigated. The key role of dual use technologies in the development of a global system of standardized production and a special role of the Chinese economy in the development of the economy of scale, which the country played in the 21th century, are described. The author comes to the conclusion that the cyclical downturn of the world economy is caused mainly by the exposition of the techno-economic model of standardized production, which leads to the aggravation of international economic conflicts and contradictions such as trade wars, global supply chain disruption, disintegration and many others. The destruction of the standardized economy of scale is manifested in the increase in the production and transportation costs, the global inflation growth, the global supply chain disruption. In the study the author applies the methods of empirical research and theoretical cognition. Methodological novelty is presented in the argumentation of the global economic transition from a standardized economy of scale to a non-standardized economy of scope. The business localization, the new trend towards resource saving mode in production, the necessary diversification of industrial production consistent with the specifics of the given locality are just a few among others arguments that testify to this transformation. The article highlights preliminary features of economy of scope, based on the non-standardized technologies, such as heterogeneity, diversification of production, continues technological improvement, compliance with a specific regional comparative advantage in business clustering.

Macro-prudential policies to contain the effect of structural risks on financial downturns

We investigate the extent to which various structural risks exacerbate the materialization of credit risk and affect financial cycle downturns. We use a large database covering all sorts of cyclical and structural features of the financial sector and the real economy for a panel of 30 countries over the period 2006Q1–2019Q4. We show that elevated levels of structural risks may have an important role in explaining the severity of credit risk materialization during financial cycle contractions. Among these risks, private and public sector indebtedness, banking sector resilience and concentration of real estate exposures stand out. Moreover, we show that the elevated levels of some of the structural risks identified may be related to long-standing accommodative economic policy. Our evidence implies a stronger role for macroprudential policy, especially in countries with higher levels of structural risks.

The Role of Gas Path Diagnostics in the Changing Gas Turbine After-market

Aero gas turbine maintenance strategies are likely to see profound changes in the future. The remarkable size of the aftermarket for both military and civil aero gas turbines has already changed the nature of the business case. The aftermarket is large, more lucrative and not subject to the cyclical downturns of the original equipment sales. The competition which this considerably profitable after market creates will spur advances in diagnostic techniques. Of particular importance is advanced gas path diagnostics where, in recent years, engineering science research has opened pathways using somewhat surprising technologies. The paper will present work covering linear and non-linear gas path analysis, genetic algorithms, neural networks, fuzzy logic and hybrid systems. Much of the costs associated with the gas turbine after market relates to the gas path and these techniques are seen to play an important role

Вплив деяких зовнішніх чинників на фінансову нестабільність в Україні

Introduction. The nature of Ukraine's economic development over the past thirty years reflects its dependence on global financial and economic cycles. The nature of this dependence lies in the stable interrelationship of the global commodity markets with factors of internal financial stability. One of the important ways to overcome such dependence is a nationally-rooted monetary policy aimed at supporting domestic economic activity and weakening the influence of the external environment on financial stability. Problem Statement. Increasing the internal financial stability of the national economy and the regulatory potential of monetary policy by limiting their dependence on global economic cycles. Purpose: Formalization of the relationship between the financial stability of the national economy and changes in the global commodity markets and the identification of prospective monetary policy measures to mitigate them. Methods. General scientific and special methods are used : theoretical generalization, systematic, abstract-logical and comparative analysis, synthesis, grouping. Results. The article summarizes the regularities that determine the cyclical repetition of financial and economic crises in Ukraine. In particular, it was noted that the stability of small open economies, a significant share of whose income is formed by the export of raw materials, largely depends on the situation on the global raw materials markets. Cyclical downturns in these markets cause financial crises, which lead to the decapitalization of small open economies and thus make their structural innovative development impossible. Conclusions. In order to ensure the sustainable development of small open raw material economies, it is necessary to carry out an appropriate institutional policy of the state aimed at ensuring the development of a more complex economic base with a departure from raw material dependence. This requires a corresponding modernization of monetary policy in terms of expanding control over the movement of capital flows, limiting the volatility of the exchange rate.

Crisis-induced innovation and crisis-induced innovators

ABSTRACT The literature on the persistence of innovation focuses on whether firms reduce, increase, or maintain their innovation activity over time, and in particular through cyclical downturns and crisis periods. What this literature tends to underemphasise is that innovation is also a tool firms can actively use to manage the unforeseen circumstances that arise in times of crisis. We argue and find that this kind of crisis-induced innovation displays patterns that are both similar to, and different from, the innovation behaviours found in more stable periods. More firms turn to innovation, but with important differences in intensity and expected long-run returns. Pre-crisis experience in innovation and organisational agility are key characteristics leading to higher levels of innovation in response to a crisis, higher likelihood of increasing the resources allocated to innovation during a crisis, and higher expected post-crisis value from the innovations undertaken in response to a crisis.

Yield spreads and business cycle downturn predictability across Texas, 1991-2018

Yield spreads and business cycle downturn predictability across Texas, 1991-2018

The duration of acceleration cycle downturns: duration dependence, international dynamics and synchronisation

This paper analyses the factors that affect the duration of economic downturns using data for growth (acceleration) cycles for 13 industrialised countries over the period 1950–2018. Our findings show that downturn periods die of old age. We also find that when trading partners are in a downturn, the duration of a country’s downturn is likely to be shorter, a likely outcome of common stabilisation mechanisms or terms of trade changes. Additionally, more open economies are found to experience shorter downturn periods and European Union countries show a higher level of synchronisation than the others. Lastly, trade linkages are found to intensify acceleration cycle synchronisation.

Did the Finnish depression of the early 1990s have a silver lining? The effect of unemployment on long-term physical activity

This paper studies the impact of long-term unemployment on physical activity. We examined the effects 6 and 15 years following a severe business cycle downturn in Finland over the period 1991–1994. The study sample comprised residents of Northern Finland. The unemployed individuals were 23–26 years old during the downturn. Physical activity, measured by MET minutes and meeting WHO guidelines, was higher 15 years later among those people who experienced the longest periods of unemployment in 1991–1994. Physical activity was somewhat lower among people with relatively shorter periods of unemployment.

Regression Analysis of Macroeconomic Conditions and Capital Structures of Publicly Listed British Firms

Using an unbalanced panel of 922 non-financial companies publicly listed on the London Stock Exchange during January 1995 and September 2014, this article tests the predictions of Pecking Order Theory (POT), Trade-off Theory (TOT) and Market Timing Theory (MTT) of capital structure through the lens of macroeconomic conditions. We find strong evidence that leverage is negatively associated with the business cycle but positively related to stock market performance, which is consistent with POT. In addition, leverage is negatively related to financial market risk, as predicted by TOT. Furthermore, leverage is positively related to credit supply, which is in line with both the POT and TOT. Finally, there is no evidence in support of MTT. The above results are robust with respect to the measurement of macroeconomic variables, the choice of estimation methods and the inclusion of a dummy variable to account for the effect of the 2008 financial crisis. An important implication is that, because firms tend to be highly levered during business cycle downturns, expansionary fiscal and monetary policies to encourage more business borrowings may not be effective after all.

Monetary policy in a world of radical uncertainty

Monetary policy in a world of radical uncertainty

ЦИКЛІЧНИЙ ТА СТРУКТУРНІ АСПЕКТИ ФІНАНСОВОЇ ВРАЗЛИВОСТІ МАЛОЇ ВІДКРИТОЇ СИРОВИННОЇ ЕКОНОМІКИ

Introduction. During periods of instability, there is an interruption of the investment process and capital flight. On the one hand, this complicates the course of the phase of financial instability, and on the other hand, it makes the development of complex technological industries that require long-term financing impossible. The article shows the regularity of such a transmission of cyclical downturns in the strengthening of structural vulnerability of small open commodity economies using the example of Ukraine. In accordance with the change in the conditions of external commodity markets, they have a pro-cyclical effect, provoking the accumulation of structural vulnerabilities in the form of growth in budget expenditures and imports due to increased export earnings and investments in favorable phases of the cycle, and intensifying factors of instability in periods of recession. Materials and methods. The research used methods of theoretical generalization, abstraction, synthesis and deduction, statistical and economic analysis. Data from the World Bank and the National Bank of Ukraine were used as statistical series. Scientific publications and reports of international organizations in the relevant areas have been used. Results and discussion. The article shows that the fixation of the structural basis of the economy is an important factor in vulnerability. In this regard, one of the key factors in increasing cyclical and structural instability is uncontrolled exchange rate volatility. Procyclical strengthening of the national currency in favorable phases limits the profitability of exports and makes imports cheaper, attracts speculative capital, and encourages an increase in the budget deficit. In periods of instability, uncontrolled devaluation increases the negative effects of instability, provoking financial crises. Conclusions. In order to get out of such a closed circle of cyclical-structural vulnerability, it is advisable to introduce a policy of controlling capital flows and move to an intermediate regime of the exchange rate with a limitation of its pro-cyclical volatility.

Episodic incidence of Harrodian instability and the Kaleckian growth model: A Markov‐switching approach

AbstractTo assess the conditional stability properties of the Kaleckian growth framework in the medium‐run, I investigate behavioral corridors where investment will be unresponsive to departures of actual from desired utilization rates—thus providing for the episodic incidence of Harrodian instability. I empirically assess this relationship using two‐state Markov‐Switching Structural Vector Auto‐Regression fit on non‐residential fixed investment and the rate of capacity utilization for the United States. To directly assess the relevance of a behavioral corridor for the cyclical dynamics of the endogenous variables, the probabilities governing the transition between hidden states are modelled as a time‐varying function of gap between realized utilization rates and their long‐run average. Results suggest the response of investment to structural utilization shocks is highly regime‐dependent and predominantly occurs during business cycle downturns.

On the aggregate effects of global uncertainty: Evidence from an emerging economy

AbstractThis paper empirically examines the aggregate effects of global uncertainty using monthly South African data. The empirical analysis is implemented in the context of vector autoregressions (VAR), augmented with various proxies for economic and financial indicators. The evidence shows that global uncertainty shocks are a significant source of economic fluctuations—they are estimated to significantly explain the cyclical downturn and exert negative impact on the financial and stock markets. These results are consistent with the view that uncertainty shocks are an important exogenous source of cyclical fluctuations and the reactions in the financial market play an important role in the impact of uncertainty shocks on the real economy. The evidence shows that uncertainty is important to the inflation dynamics while inflation and output co‐move negatively conditional on uncertainty shocks.

Hedging UK stock portfolios with gold and oil: The impact of Brexit

The purpose of this paper is to examine dynamic co-movements and portfolio management strategies between UK stock indices (aggregate market index and sector indices) and each of gold and crude oil futures markets, during the Brexit referendum (2016) and the Brexit day (2021). Using multivariate GARCH models, the time-varying conditional correlations between the focal markets are extracted. Then, portfolio weights, hedge ratios, hedging effectiveness, and downside risk reductions are determined. The results reveal that, during the Brexit referendum period, gold and crude oil provide a diversification opportunity for the UK stock portfolios. Specifically, investors should give more weight to gold than stocks in their gold–stock portfolios, whereas they should allocate more funds into stocks than oil to minimize risk in their oil–stock portfolios. Based on hedging analysis results, crude oil appears more effective than gold in reducing stock portfolio exposure to downside risk and in improving the hedging effectiveness. Further analysis involving an event study considers the potential shift in the correlations between the UK stock market index (sector indices) and each of gold and crude oil during short-term event widows (one day, one day; five days, five days; and ten days, ten days) around the announcement day of the initial, transmission and actual Brexit periods or during each of these sub-periods. The results show that early news about Brexit led to a substantial change in the means of correlation coefficients in comparison to the tranquil period, where the initial UK stock price movements were driven by fears of a cyclical downturn following the referendum.

Data analytics for fuel consumption management in maritime transportation: Status and perspectives

The shipping industry is associated with approximately three quarters of all world trade. In recent years, the sustainability of shipping has become a public concern, and various emissions control regulations to reduce pollutants and greenhouse gas (GHG) emissions from ships have been proposed and implemented globally. These regulations aim to drive the shipping industry in a low-carbon and low-pollutant direction by motivating it to switch to more efficient fuel types and reduce energy consumption. At the same time, the cyclical downturn of the world economy and high bunker prices make it necessary and urgent for the shipping industry to operate in a more cost-effective way while still satisfying global trade demand. As bunker fuel bunker (e.g., heavy fuel oil [HFO], liquified natural gas [LNG]) consumption is the main source of emissions and bunker fuel costs account for a large proportion of operating costs, shipping companies are making unprecedented efforts to optimize ship energy efficiency. It is widely accepted that the key to improving the energy efficiency of ships is the development of accurate models to predict ship fuel consumption rates under different scenarios. In this study, ship fuel consumption prediction models presented in the literature (including the academic literature and technical reports as a typical type of “grey literature”) are reviewed and compared, and models that optimize ship operations based on fuel consumption prediction results are also presented and discussed. Current research challenges and promising research questions on ship performance monitoring and operational optimization are identified.

Industrial Connectedness and Business Cycle Comovements

While aggregate shocks account for most business cycle fluctuations, sectoral shocks have become relatively more important since the 1980s. Previous studies show that sectoral shocks propagate through industry supply chains. Typically, sectors are defined by similarities in function and/or market. While some industries have supply chains within their own sector (vertical), others have supply chains across a number of sectors (horizontal). Similarity in these supply chain characteristics appear to be a determining factor in how industries comove. Using industrial production data of 82 four-digit NAICS industries over the period 1972 to 2019, this comovement is analyzed in a panel Markov-switching model incorporating a number of features relevant for sub-national analysis: (i) industry-specific trends that differentiate cyclical downturns from secular declines; (ii) a national-level business cycle; and (iii) factors that represent industrial comovement. While national-level shocks are typically still the most important driver of cyclical fluctuations, endogenously clustering by industry comovement highlights the role of sectoral shocks.

Moral hazard in a modern federation

Arguments against providing fiscal aid to state governments usually rely on a simplistic moral hazard argument: supporting states through a cyclical downturn encourages them to overspend. This argument undergirds the policy recommendations made by the mainstream literature on Fiscal Federalism. I argue that these accounts are predicated on a misunderstanding of what it means to be an agent with respect to one’s budget over the business cycle. Basic corporate finance theory teaches us that in order to have control over the relative movement of income and expenditure in the current period, one must be able to design one’s own capital structure. US State governments are institutionally and constitutionally prevented from designing their own capital structures, and as such, cannot be judged to have budgetary agency across the business cycle. I show that the moral hazard problem presented in the fiscal finance literature is ill-posed, and obscures a second, more important problem of moral hazard. Namely, that politicians at the federal level reap the political rewards of pursuing austerity at the state level while remaining insulated from any political, economic, or social costs or responsibility. This second moral hazard problem admits of a simple solution: trigger-based fiscal aid to state governments.

Can state and local government capital spending be a vehicle for countercyclical policy? Evidence from new interview and survey data

This paper investigates the extent to which state and local government capital spending in the United States can be an effective vehicle for countercyclical policy. Policy responses to recent cyclical downturns have included a variety of policies to encourage greater spending at the state and local level, including efforts to lower borrowing costs for these governments, but the effectiveness of these policies remains unclear. To examine the effectiveness of state-local capital spending as a countercyclical tool, I use a unique data set consisting of open-ended interviews with state and local budget officers and a survey of state governments. I find that at present, there are significant barriers preventing countercyclical state-local capital spending. First, interventions to stimulate capital spending via easing financing conditions are likely limited by two factors: some governments use minimal amounts of borrowing to finance capital spending, and for governments that do rely primarily on borrowing, capital spending appears insensitive to interest rates. Second, state and local capital spending decisions involve substantial lags, making it a poor vehicle for countercyclical fiscal policy even in the absence of financing constraints. Third, state-local budget officials do not view capital spending as a tool for economic stabilization.

Remarks by Shruti Rana

We find ourselves today poised on the edge of a moment of transition. As the traditional structures and institutions of the post-World War II global legal order weaken or fall around us, international lawyers have been questioning whether what we are witnessing is merely a cyclical downturn in the strength and utility of the international legal order, that is, just another periodic adjustment or ebb from the high-water mark of the 1990s—or whether we are instead witnessing the messy and painful collapse of one order and the bloody birth of another.