General Business Cycle Research Articles

The effect of the economic collapse in Iceland on the probability of cardiovascular events

After several years of a booming economy in Iceland, the economic bubble burst in 2008 and affected most Icelanders in one way or another. We explore whether the economic collapse in 2008 and subsequent economic crisis affected the probability of ischemic heart disease (IHD) events, independent of regular cyclical effects that can be attributed to typical economic conditions. Moreover, we conduct a mediation analysis to study the potential mechanisms through which the relationship between the economic collapse and cardiovascular health travels. We estimate linear probability models using administrative data on IHD events, earnings and balance-sheet status, as well as unemployment for all Icelanders aged 16 and older in 2000–2014.We find that the sharp change in economic conditions in 2008 increased the probability of cardiovascular events in both males and females in the long term. In absolute terms, these effects were small in magnitude but often statistically significant, amounting to approximately 13–16 extra cases of IHD events in each of the two years following the collapse for males and 3–5 addition cases for females. Moreover, they contrast with the finding that general business-cycle fluctuations operated in the opposite direction. Several potential mediators were correlated with the probability of IHD events, but their inclusion had little impact on the estimated effects of the economic crisis. A statistically significant business-cycle effect is found for both genders indicating that in general, harder economic times are beneficial for heart health. Thus, the general business cycle and the economic collapse in 2008 and subsequent crisis can be thought of as separate phenomena with differing effects on IHD.

Endogenous Tradability, International Relative Prices, and the International Transmission of Business Cycles

This paper propose a two-country, dynamic, stochastic, general equilibrium (DSGE) model with endogenous tradability, product differentiation, variously determined physical capital, and an elastic labor supply to explore the propagation of business cycles across countries. The model successfully addresses international relative price dynamics (its appreciation with positive home productivity shock, called the ‘Harrod-Balassa-Samuelson Effect’) through the entry of producers and their cut-off productivities of exporting. The use of endogenous physical capital in the model induces a more realistic framework since the simulated model is compared to the U.S. investment data that covers spending on capital equipment, structures and inventories for producers’ entry and exit dynamics. Building the model with endogenous capital and elastic labor supply weakens the volatility of investment compared to conventional international real business cycle (IRBC) models. The model also accounts for several features of the data, such as the volatility of aggregate variables and their correlations with GDP.

Transport services and the valuation of flexibility over business cycles

The paper discusses the value of flexibility in light of transportation industry characteristics. High flexibility in utilising or adjusting capacity typically reduces the value of financial options on freight rates. Flexibility to lay up transportation capacity may affect the supply elasticity, the dynamics of freight rates and the valuation of real or financial options. The framework of the analysis is an industry specific model for the valuation of a European option. The model’s equilibrium specification indicates a link between the dynamics of freight rates, discount factors and the general business cycle. Data from the dry bulk maritime industry illustrates this phenomenon.

The Business Cycle and Cycles in The Banking Sector in The Polish Economy in The Years 2000‒2017

Abstract Apart from general business cycles, market economies are characterized by their specific cycles, which also include banking cycles. Fluctuations whose sequence over time creates the banking cycles are absolute or/and relative changes in the activity of banks, manifested in the form of oscillations in the supply of money and bank credits granted for investment or consumption purposes. The aim of this article is to analyze the influence of general business cycles on changes in the activity of the central bank and commercial banks, and to examine a returnable relationship between banking activities and business cycles. The paper consists of two parts. The first one presents a theoretical hypothesis connected with the analyzed relations. The second part contains the results of the empirical analysis of the morphology of the cycles identified in the Polish economy. In the process of identifying the cycles under analysis, the concept of deviation cycles was taken into account. Deseasonalization was conducted using the Tramo/Seats procedure as part of the Demetra 2.0 package, and in the process of isolating cycles, the Hodrick-Prescott filter was accepted.

SOME INTERNATIONAL ASPECTS OF BUSINESS CYCLES: NEISSER, HABERLER, AND MODERN OPEN ECONOMY MACROECONOMICS

Despite the transnational character of the Great Depression, there are few works in the interwar literature that deal with the propagation of business cycles across national borders and systemic risks of depression in the world economy. Two notable exceptions are Hans Neisser’s Some International Aspects of the Business Cycle (1936) and chapter 12 in Gottfried Haberler’s Prosperity and Depression ([1937] 1964), which carries the heading “International Aspects of Business Cycles.” Both works differ substantially from each other and from the modern way of thinking about international business cycles in open economy macroeconomics. Haberler’s and Neisser’s approaches help to identify relevant issues that have been lost from sight in modern open economy macroeconomics.

Shipping in Dire Straits: New Evidence on Trends and Cycles in Coal Freights from Britain, 1919-1939

New monthly freight rate indices for 13 coal trade routes from Britain 1919-1939 are presented. The new indices form the basis of a review of the interwar freight markets and their relationship to the timing and severity of general business cycles. New time series of laid-up tonnage provide the background for this discussion. The Great Depression starting in the autumn of 1929 created a shipping cycle of unusual length and severity. Real freight rate indices used as a cross-check on productivity gains in shipping raise some doubt on previous estimates of productivity growth in British shipping in the interwar years.

Transformation of the Capital Market Stability Model under the Influence of the Financial Globalization

In the course of economic globalization a process of formation of the united financial market has evolved.Integratedness of different sectors of financial market into its global form is largely stipulated by development offinancial innovations and of new financial instruments. Subjacent and timeless nature of modern financialtransactions leads to blurring of distinction between money and capital markets. The united market means agradual merge of financial risks and increase of volumes and unpredictability of aggregate risk in the result ofsynergetic effect contained in the nature of financial market as of a nonlinear dynamical system. Seriousinfluence on stability of financial market has a behavioral psychology of its participants that is connected withreflexivity specific to financial capital. Financial market can be described only by nonlinear stochastic equations.In this article we made the efforts to set the parameters for such a model. Basing on non-stability of a globalfinancial market and under influence of globalization factors it was concluded that it is necessary to check thehypotheses on formation of a financial cycle apart from general business cycle.

Some International Aspects of Business Cycles: Neisser, Haberler and Modern Open Economy Macroeconomics

Despite the transnational character of the Great Depression of the years 1929-33, there are few works in the inter-war literature that deal in depth with the propagation of business cycles across national borders and systemic risks of depression in the world economy. Two notable exceptions are Hans Neisser’s monograph on Some International Aspects of the Business Cycle (1936) and chapter 12 in Gottfried Haberler’s Prosperity and Depression (1937), which carries the heading “International Aspects of Business Cycles”. Both works differ substantially from each other and from the modern way of thinking about international business cycles in Open Economy Macroeconomics. This paper argues that Neisser’s and Haberler’s approaches provide more straightforward routes to capturing some of the transnational aspects of the recent Great Recession (of 2008/09) than the modern standard approach. At the first stage, the two older approaches are presented and compared with each other. At the second stage, they are contrasted with the current state of open-economy macroeconomics, as represented by Uribe & Schmitt-Grohe (2014), a textbook in the making that puts international macro in a business cycle framework. Since Haberler’s account accentuates the role of transport costs, imperfections of capital markets and monetary policies, it can be used as a catalogue of criteria for checking what modern attempts to connect international trade, international finance and economic growth have got (back) in sight. More importantly, both Haberler’s and Neisser’s approach also serve to identify what has been lost out of sight.

Measuring CPI's reliability: the stochastic approach to index numbers revisited

The reliability measurement of the Consumer Price Index (CPI) has recently drawn much attention, as the index number has been criticized for its inaccuracy in accessing the degree of inflation. This article centers on providing a new regression specification that can help better gauge the CPI's reliability. More specifically, based on the stochastic approach to index numbers, we argue that the conventional treatment of the systematic changes in relative prices should be made time variant. We therefore propose a more comprehensive regression specification by including additional dummies that represent different general inflation rate levels and business cycle phases. Under this framework, we are more capable of avoiding possible misspecifications in the regression equation, as was experienced by Clements and Izan (1987). It also allows us to better answer the ‘Keynes’ critic’ regarding the stochastic approach to index numbers. The empirical results of Australia and the US are used to validate the merit of our specification.

When Do Stock Market Booms Occur? The Macroeconomic and Policy Environments of 20th Century Booms

Since the mid-1990s, many countries have experienced prolonged periods of rapid price appreciation in equity, housing, and other asset markets which have drawn the attention of economists and policymakers to the role of asset prices in the propagation of business cycles. Economists disagree about the appropriate response of monetary policy to such asset price booms. Some argue that financial markets are inherently volatile and that market prices often stray from fundamentals, suggesting that policymakers could improve welfare by deflating asset price booms, especially if sudden asset price declines are likely to depress economic activity. Other economists claim that financial markets process information efficiently or that policymakers usually cannot determine when assets are mispriced and, hence, that they cannot enhance aggregate welfare by reacting to asset price movements. Such episodes have also fascinated financial historians, and research into these phenomena has yielded important information about the development of financial markets and the effects of financial regulation and macroeconomic policy on the stability of markets. We believe that history can also inform the debate about the appropriate response, if any, of monetary policy to asset price booms. Accordingly, this chapter investigates the macroeconomic and policy environments in which stock market booms occurred among ten developed countries during the twentieth century. Our multi-country historical approach enables us to explore the association between stock market booms and key macroeconomic and monetary policy variables across a variety of policy regimes and regulatory environments.

Cyclical industrial dynamics: The case of the global semiconductor industry

In this paper, we focus on firms' cyclical behavior in the global semiconductor industry. We demonstrate that these cyclical dynamics at the industry level differ from both the business cycles at the macro-economic level and the lengthy industrial technology life cycle. We discuss a range of possible causes of those cyclical industrial dynamics, including the general business cycles as well as industry-specific factors. Our study reports three stylized facts in relation to the cyclical industrial dynamics in the global semiconductor industry: first, the industry is more concentrated during the industry cycle downturns; second, the capital investment of the industry as a whole follows a ‘pro-cyclical’ pattern; and third, firms that pursued a ‘counter-cyclical’ capital investment strategy during the industry cycle downturn have reaped rewards during the subsequent cycle period. These facts suggest that cyclical industrial dynamics, especially the industry cycle downturns, play an important role in firm rivalry, strategic positioning and industrial growth.

ECONOMIC DETERMINANTS OF INTERNAL MIGRATION RATES: A COMPARISON ACROSS FIVE EUROPEAN COUNTRIES

ABSTRACTThis paper addresses the issue of the relationship between internal migration rates at NUTS 2 level and economic developments. For five European countries, several hypotheses were tested on three groups of economic variables: general business cycle indicators, financial variables as well as variables reflecting more structural labour market developments. The empirical analysis is based on first differences of all variables. Although some support was found for all of the hypotheses tested but one, the main conclusion is that there is a stable relationship between GDP per capita and internal migration that is highly similar across countries.

Modelling Portfolio Defaults Using Hidden Markov Models with Covariates

We extend the hidden Markov Model for defaults of Crowder et al. (2005, Quantitative Finance 5, 27-34) to include covariates. The covariates enhance the prediction of transition probabilities from high to low default regimes. To estimate the model, we extend the EM estimating equations to account for the time varying nature of the conditional likelihoods due to sample attrition and extension. Using empirical U.S. default data, we find that GDP growth, the term structure of interest rates and stock market returns impact the state transition probabilities. The impact, however, is not uniform across industries. We only find a weak correspondence between industry credit cycle dynamics and general business cycles. © Royal Economic Society 2008.

Productivity-based asset pricing: Theory and evidence

In a general real business cycle model, we derive a pricing kernel that involves only production function arguments. The productivity shock is the single factor and the capital stock relative to a productivity measure is the conditioning variable. The model compares favorably with the complementary consumption-based and market-based approaches and with the Fama-French three-factor model. A size premium arises from differences in unconditional sensitivities—small firms are more sensitive to productivity shocks—and a value premium from differences in conditional sensitivities to productivity shocks—growth firms are more sensitive to productivity shocks when the productivity risk premium is low.

As the PMI Turns: A Tool for Supply Chain Managers

SUMMARYSupply chain managers use the PMI, an index of business activity and proxy for the general business cycle, to obtain valuable information important to strategic managerial planning. This research explores a methodology to provide managerial insight into the general business cycle by tracking and forecasting cycle turns in the PMI. A regression model is developed based on inherent cycles in the PMI between 12 and 65 months to forecast turning points for the index and anticipate changes in the business cycle, which is superior to the more commonly used Box‐Jenkins forecasting technique. Strategic planning using this knowledge allows management to optimally adjust long‐term levels of production, inventory, employment and orders as necessary.

Nonparametric Regression and the Detection of Turning Points in the Ifo Business Climate

Business climate indicators are used to receive early signals for turning points in the general business cycle. Therefore methods for the detection of turning points in time series are required. Estimations of slopes of a smooth component in the data can be calculated with local polynomial regression. A change in the sign of the slope can be interpreted as a turning point. A plug-in method is used for data-based bandwidth choice. Since in practice the identification of turning points at the actual boundary of the time series is of special interest, this situation is discussed in more detail. The nonparametric approach is applied to the Ifo Business Climate to demonstrate the application of the nonparametric approach and to analyze the time lead of the indicator.

Incorporating the Real Estate Cycle into Management Decisions—Evidence from Germany

Executive Summary. As in many industrialized countries, German real estate markets have been subject to cyclical fluctuations. Rottke and Wernecke (2002) made an attempt to estimate the extent to which cycle knowledge might be implemented in practice. This paper presents the results of a survey of German real estate practitioners. It identifies rent and price fluctuations as the two most important cycle variables. In addition, the general business cycle is perceived as the most important influence on the real estate cycle. Still, German market participants think of the real estate cycle more in terms of opportunities than of risks. Finally, the study finds that cycle strategy is important especially in project development, portfolio management and real estate finance.

Complementarity of Labor Market Institutions, Equilibrium Unemployment and the Propagation of Business Cycles

Abstract This paper evaluates complementarities of labor market institutions and the business cycle in the context of a stochastic dynamic general equilibrium model economy. Matching between workers and vacancies with endogenous time spent in search, Nash-bargained wages, payroll taxation, and differential support for unemployed labor in search and leisure are central aspects of the model. For plausible regions of the policy and institutional parameter space, the model exhibits more persistence than standard real business cycle models and can exhibit indeterminacy of rational expectations paths without increasing returns in production. Furthermore, labor market institutions act in a complementary fashion in generating these effects.

Explaining business cycles in small open economies: ‘How much do world prices matter?’

This paper analyzes the role of world price shocks – fluctuations in the prices of capital, intermediate, and primary goods, and in the world real interest rate – in the generation and propagation of business cycles in small open developing countries. I construct a stochastic dynamic multi-sector small open economy model. The model is a variant of the specific-factors model and reflects the major structural characteristics of developing economies. I utilize variance decomposition methods to quantitatively evaluate the impact of world price shocks. The results indicate that world price shocks account for a significant fraction of business cycle variability in developing countries.

Housing cycles and efficiency

This paper has four objectives. First, a small model of the UK housing market is constructed, including equations for house prices, housing starts, construction costs and interest rates. The model is used in an analysis of housing market cycles, employing techniques developed for the analysis of general business cycles. Second, the model is used to consider housing market efficiency. Third, the model is extended to examine the relationship between house prices and property transactions. Finally, the role of monetary policy in the generation of housing cycles and stability is discussed.