Macroeconomic Business Cycle Research Articles

행동과학의 렌즈로 재조명한 정치적 경기순환론

The political business cycle theory demonstrates that incumbent politicians opportunistically manipulate macroeconomic business cycles such as inflation or unemployment to further their chances of re-election. Since Nordhaus’s (1975) pioneering model on the topic, both economists and political sciences have long examined the interdependence of political and macroeconomic outcomes within various contexts. Notwithstanding the promise of the theory of political business cycle, less attention has been paid to its theoretical assumptions—voters’ formation of the image for the incumbent and the durational effect of political manipulation of macroeconomic variables. Drawing insights from behavioral science, this study examines how macroeconomic outcomes in the election year affect the percentage of votes in the next election year in the Korean local government contexts. Findings suggest that the assumptions of political business cycle theory need to be expanded to enhance its theoretical development and practical applications.

Venture Capital Booms and Start-Up Financing

We review the growing literature on the relationship between venture capital (VC) booms and start-up financing, focusing on three broad areas. First, we discuss the drivers of large inflows into the VC asset class, particularly in recent years, which are related to but also distinct from macroeconomic business cycles and stock market fluctuations. Second, we review the emerging literature on the real effects of VC financing booms. A particular focus of this work is to highlight the potential impact that booms (and busts) can have on the types of firms that VC investors choose to fund and the terms at which they are funded, independent of investment opportunities—thereby shaping the trajectory of innovation being conducted by start-ups. Third, an important insight from recent research is that booms in VC financing are not just a temporal phenomenon but can also be seen in terms of the concentration of VC investment in certain industries and geographies. We also review the role of government policy, exploring the degree to which it can explain the concentration of VC funding in the United States over the past 40 years in just two broad areas—information and communication technologies and biotechnology. We conclude by highlighting promising areas of further research.

The Effects of Macroeconomic Business Cycle on Earnings Management: Evidence from Korean Companies

This paper examines the relationship between macroeconomic business cycles and earnings management, specifically, whether firms make more earnings management during the boom period of the macroeconomic business cycle or during contraction period of the business cycle. Earnings management is activities of getting certain benefits by involving in external financial reporting or confusing certain stakeholders through adjustments to accruals without involvement of cash flows or with cash flows through real activities. In examining the relationship, we used the models of Kothari et al. (2005) and Cohen et al. (2008) for accrual-based earnings management (AEM) and real activities earnings management (REM), respectively, for earnings management proxies. We also used composite economic indicators, real GDP growth and BSI for proxies of macroeconomic business cycles. Using a data set for Korean companies listed from 2005 to 2017, we developed and tested a panel regression model with fixed effects to capture the relationship. The results show that companies perform earnings management more often during economic booms than during contraction periods. This is interpreted that firms try to avoid disclosure of lower net income compared to the expectations of analysts or average net income of companies in the same industry. This study is giving insights to external auditors when they perform external audit on the firms’ financial statement, they need to spend more attention on the firms’ earning management behaviors during boom period rather than contract period. It applies the same to analysts of securities.

Disentangling the Effects of Uncertainty, Monetary Policy and Leverage Shocks on the Economy*

AbstractIn this paper, we assess the information content and predictive ability of various risk and uncertainty measures in predicting various measures of real economic activity as well as undertake a comparative analysis of the relative importance of uncertainty, monetary policy and leverage shocks in the macroeconomic business cycle. We find that the macroeconomic uncertainty index and the Chicago Fed national financial conditions risk index have the strongest predictive relationship with economic activities. Also, in the context of a Bayesian monetary structural vector autoregressive, we use the penalty function approach to a sequential identification of uncertainty, monetary policy and leverage shocks, and find that uncertainty shocks are a relatively more important source of variations in the economy than traditional monetary policy shocks. However, monetary policy shocks still outperform uncertainty shocks in explaining inflation dynamics.

Venture Capital Booms and Startup Financing

We review the growing literature on the relationship between venture capital booms and startup financing, focusing on three broad areas: First, we discuss the drivers of large inflows into the venture capital asset class, particularly in recent years -- which are related to but also distinct from macroeconomic business cycles and stock market fluctuations. Second, we review the emerging literature on the real effects of venture capital financing booms. A particular focus of this work is to highlight the potential impact that booms (and busts) can have on the types of firms that VCs choose to fund and terms at which they are funded, independent of investment opportunities -- thereby shaping the trajectory of innovation being conducted by startups. Third, an important insight from recent research is that booms in venture capital financing are not just a temporal phenomenon but can also be seen in terms of the concentration of VC investment in certain industries and geographies. We also review the role of government policy, exploring the degree to which it can explain the concentration of VC funding in the US over the past forty years in just two broad areas – information and communication technologies (ICT) and biotechnology. We conclude by highlighting promising areas of further research.

Russia’s Macroeconomic Policy, Bank Lending and Business Cycles

Russia’s Macroeconomic Policy, Bank Lending and Business Cycles

The Development of Small Enterprises During and After Crisis: Comparative Analysis of Greece and Poland

Purpose: The purpose of the paper is to offer a comparative analysis of the development of small enterprises in Greece and Poland in the period just after global financial crisis which turned into an economic and social crisis for some countries, as the Greek example. The paper aims to discuss differences and similarities of small enterprises in two countries that suffered to a different level of the economic crisis. Design/methodology/approach: The authors decided to adopt three quantitative measures determining the degree of development of these companies: the number of active enterprises, the number of employees and the contribution to the Gross Domestic Product (GDP). The above measures were analyzed against the background of changes in the economic growth rate. Findings: Both countries were affected by the economic crisis but to a different level. Especially Greek economy suffered from the consequences of the austerity policy applied as a consequence of the agreement to obtain the international financial support. Poland on the contrary did not have to apply such an austerity program. Crisis consequences had severe consequences on the economy and negative effects on the GDP of these countries. Research limitations/implications: It should be noted that the presented results are based on quantitative methods, while the economic development also covers qualitative issues. Nevertheless, the analysis of data suggests the existence of a relationship between the adopted measures of small enterprises development and the value of GDP. Therefore, it indicates the need for further research, using more advanced methods of analysis. It is also worth expanding the research using qualitative methods. Originality/value: The paper contributes to the market failure theory in the area of macroeconomic business cycles. As the downswings because of crises influence on activity of enterprises, there is a need of appropriate government intervention. The analyzed examples suggest that higher level of monetary and credit policy in Poland seems to have a positive impact on the development of small enterprises in the analyzed space time. On the contrary, the austerity program in Greece might negatively affect the small companies.

The Development of Venture Capital in Latin America: A Comparative Perspective

Venture Capital (VC) helps financing high-growth ventures in the business ecosystem. The development of Latin American VC lags behind developed economies, but also behind China and India. Nonetheless, in the recent boom regional VC grew 30% yearly (2005-2011). VC investments in Latin America are less hi-tech, larger and more likely to be funded from abroad than in benchmark regions. Deals are made by investors with less experience and in fewer rounds than comparables. VC growth was highly dependent on the macroeconomic business cycle. Results show symptoms of an early stage of development with relatively fewer high-tech ideas than money.

Innovation and firm growth over the business cycle

This paper investigates how the macroeconomic business cycle impacts the empirical relation between innovation and firm growth. Based on representative panel data of Swiss firms ranging from 1996 to 2014, the paper finds that firms with innovations based on R&D activities show higher sales growth rates than non-innovative firms in periods dominated by economic recessions. This finding is in line with the idea that recessions play an important role in the adaptation process of the economy towards the innovative. In contrast, the paper finds that firms with innovations based on other, non-R&D innovation activities show higher sales growth rates than non-innovative firms in periods dominated by economic booms. Hence, while firms with innovations based on R&D activities are more resilient to business cycle fluctuations than non-innovative firms, firms with innovations based on other, non-R&D innovations activities are more sensitive to business cycle fluctuations than non-innovative firms.

Innovation and Firm Growth over the Business Cycle

This paper investigates how the macroeconomic business cycle impacts the empirical relation between innovation and firm growth. Based on representative panel data of Swiss firms ranging from 1996 t...

Demand, credit and macroeconomic dynamics. A micro simulation model

We develop a micro simulation model for the macroeconomic business cycle. Our model is based on three main ideas. First, we want to specify how macroeconomic coordination is achieved without a dominating influence of price mechanisms. Second, we want to incorporate the stock-flow-consistent (SFC) approach that has become popular in post-Keynesian macroeconomics. Existing macroeconomic models often pay no attention to how short-run outcomes (in the form of surpluses or deficits on the account balances of individual agents, or groups of agents) accumulate into long-run debt. The SFC approach models such deficits and surpluses, and their accumulation, explicitly, and imposes a logic in which these long-run balances co-determine the macroeconomic coordination outcome. Third, we want to allow for bankruptcies as a major mechanism in the business cycle. In reality, bankruptcies are a way in which long-run balances get adjusted, but most often the SFC models do not allow bankruptcies as a way in which long-run balances adjust. In our model, bankruptcies arise because agents do not adapt their behavior quickly enough as debt, or assets, accumulate. This is parametrized, so that bankruptcies can disappear in the simulation runs, which enables us to compare the nature of business cycles with and without bankruptcies. Our results show a clear business cycle that is driven by accumulation of financial assets and the effects this has on the real economy. By changing some of the key parameters, we show how the nature of the business cycle changes as a result of changes in the assumed behavior of agents.

The Impact of Financial and Trade Integration on Business Cycles in Emerging Markets

This paper investigates the combined effect of financial integration (FI) and trade integration (TI) on macroeconomic volatility and business cycle synchronisation (BCS) in emerging markets. The study adopts a two-country real business cycle model with the adjustment cost of foreign asset holding, domestic leverage constraint and asymmetric financial accessibility. The results reveal that the impacts of FI and TI are intertwined. Increasing foreign asset holding generally has a weaker impact at high trade intensity. People with restricted financial access face large consumption volatility from increased FI under low trade. The findings suggest that trade could help mitigate the negative effect of FI on consumption smoothing, and FI could help lower output fluctuation and dependence on foreign economies, while trade increases them.

Trade in Intermediate Goods: Implications for Productivity and Welfare in Korea

There have been voluminous contributions such as Daudin et al. (2011), Johnson and Noguera (2012), Koopmans et al. (2010), and Trefler and Zhu (2010) in measuring value added trade based on input-output tables as generalizations of the vertical specialization measures following Hummels et al. (2001). These studies focused on trade in intermediate goods as a key feature of recent global trade. In the case of Korea, about 50% of total exports and 70% of its total imports are intermediate goods trade. This paper contributes to the discussion about the trade in intermediate goods and productivity by revisiting Basu (1995), Jones (2011), and Lee and Pyo (2007) to examine implications of trade in intermediate goods for macroeconomic business cycles and productivity and welfare at the current stage of Korean development. The major revision of the Basu (1995) model is attempted by decomposing intermediate goods into domestically produced intermediate inputs and imported intermediate inputs to investigate implications of the model in a small open economy. The major finding is that the procyclicality of the intermediate goods usage relative to labor usage and TFP changes in both value added and gross-output regressions are significantly weaker in a small open economy like Korea than the large economy of the United States. We also investigate the effects of misallocation and multiplier effects due to intermediate goods on industrial productivity and efficiency following the model of Jones (2011). Since the effects of misallocation can be intensified through the industrial input-output structure of the economy, we calculate the intermediate goods multiplier by Korea's 29 manufacturing industries. We find technical changes and the degree of inefficiency are related with the magnitude of multipliers, but we leave a fundamental identification problem to future research.

ANALYSIS OF THE LONG-RUN RELATIONSHIP BETWEEN ECONOMIC GROWTH AND BANK CREDIT AVAILABILITY IN SOUTH AFRICA.

Purpose: The purpose of this study was to Analyze of the Relationship between Business Cycles and Bank Credit Extension: Evidence from South Africa. The study sought establish the direction of causality between economic growth and bank credit growth in South AfricaMethodology: The econometric methodology is used to augment results of the survey study. Granger causality test technique is applied to the variables of interest to test for direction of causation between variables. The study uses quarterly data for the period of 1980: Q1 to 2013: Q4. Business cycles are determined and measured by Gross Domestic Product at market prices while bank-granted credit is proxied by credit extension to the private sector.Results: Results revealed that, that there is a stable long-run relationship between macro-economic business cycles and real credit growth in South Africa. The results show that economic growth significantly causes and stimulates bank credit. The Granger causality test provides evidence of unidirectional causal relationship with direction from economic growth to credit extension for South Africa. The study results indicate that the case for demand-following hypothesis is stronger than supply-leading hypothesis in South Africa. Economic growth spurs credit market development in South Africa.Unique contribution to theory, practice and policy: It proposes practical policy prescriptions to address challenges currently facing South Africa. The other major contribution of this study is that it shall open new avenues for further research on finding causality of the relationship between various proxies of economic growth and financial development adopting the VAR framework

THE DIRECTION ANALYSIS OF CAUSALITY BETWEEN ECONOMIC AND BANK CREDIT GROWTH IN SOUTH AFRICA

Purpose: The purpose of this study was to Analyze of the Relationship between Business Cycles and Bank Credit Extension: Evidence from South Africa. The study sought establish the direction of causality between economic growth and bank credit growth in South AfricaMethodology: The econometric methodology is used to augment results of the survey study. Granger causality test technique is applied to the variables of interest to test for direction of causation between variables. The study uses quarterly data for the period of 1980: Q1 to 2013: Q4. Business cycles are determined and measured by Gross Domestic Product at market prices while bank-granted credit is proxied by credit extension to the private sector.Results: Results revealed that, that there is a stable long-run relationship between macro-economic business cycles and real credit growth in South Africa. The results show that economic growth significantly causes and stimulates bank credit. The Granger causality test provides evidence of unidirectional causal relationship with direction from economic growth to credit extension for South Africa. The study results indicate that the case for demand-following hypothesis is stronger than supply-leading hypothesis in South Africa. Economic growth spurs credit market development in South Africa.Unique contribution to theory, practice and policy: It proposes practical policy prescriptions to address challenges currently facing South Africa. The other major contribution of this study is that it shall open new avenues for further research on finding causality of the relationship between various proxies of economic growth and financial development adopting the VAR framework

A financial framework for understanding macroeconomic cycles

Purpose A comprehensive understanding business cycles needs to account not only for the allocation of resources over time but also for resource allocation across industries at any point in time. But to properly understand how these “time-distortions” take place and how the price mechanisms that drive them work, a clear and well-defined conceptualization of the “average length” of the structure of production is required. The authors use insights provided by Macaulay’s duration and Hicks’s average period to show that financial duration and related concepts have a direct connection to macroeconomic stability. Design/methodology/approach This study uses a theoretical and conceptual approach. It first presents the connection between average period of production and financial duration and then compares and applies this to macroeconomic business cycle theories. Findings This study points to important implications for macroeconomic policy. It not only claims that a low interest rate contributes to the creation of asset bubbles but also shows the market mechanism through which the real sector is affected. The application of financial concepts to macroeconomic cycles shows the price mechanism through which resources are allocated across industries. Originality/value The financial approach we offer to business cycles is fairly unexplored. As such, this paper offers a novel conceptual and theoretical framework for business cycles.

Hyperbolic memory discounting and the political business cycle

The vintage political business cycle framework of Nordhaus (1975) represents the idea that the macroeconomic business cycle is manipulated opportunistically by an incumbent government to achieve re-election. A key assumption in this prototypical framework is that voters discount their memories about unemployment and inflation at a constant rate. Yet starting with Ebbinghaus (1885) and Jost (1897), a large body of research in psychology documents an empirical regularity that has come to be known as Jost's Second Law of Forgetting—individuals discount recent memories at a higher rate compared to the rate at which they discount older memories. I find that incorporating this insight from psychology (i.e., hyperbolic memory discounting) into the benchmark framework moderates the amplitude of the predicted political business cycle.

Innovation Budgeting Over the Business Cycle and Innovation Performance

The global economic crisis of 2008/2009 hit many firms hard. Faced with rapidly declining sales and highly uncertain economic prospects, firms had to cut costs and reconsider their business strategies. With respect to innovation, cost cutting often means to stop or underresource innovation projects which may harm a firm’s long-term competitiveness. Firms may therefore refrain from reducing innovation budgets during crises but rather deliberately allocate more resources to innovation activities in order to update their product portfolio for the following recovery. Our analysis examines the effects of changes in innovation budgets during the most recent economic crisis on firms’ post-crisis innovation performance. Based on firm-level panel data from the German Innovation Survey covering the period 2006 to 2012, we find a positive effect of crisis adjustment. Raising the ratio of innovation expenditure to sales does increase subsequent sales of market novelties, but not of product imitations. Our findings are dependent upon the way business cycle effects are measured, however. While the results hold for macroeconomic business cycle indicators (change in real GDP), they do not for demand changes in a firm’s primary sales market. This may imply that lower opportunity costs of innovation during an economic crisis are transferred into higher post-crisis new product sales by firms in markets less strongly affected by the crisis.

Hyperbolic Memory Discounting and the Political Business Cycle

The vintage political business cycle framework of Nordhaus (1975) represents the idea that the macroeconomic business cycle is manipulated opportunistically by an incumbent government to achieve re-election. A key assumption in this prototypical framework is that voters discount their memories about unemployment and inflation at a constant rate. Yet starting with Ebbinghaus (1885) and Jost (1897), a large body of research in psychology documents an empirical regularity that has come to be known as Jost’s Second Law of Forgetting - individuals discount recent memories at a higher rate compared to the rate at which they discount older memories. I find that incorporating this insight from psychology (i.e., hyperbolic memory discounting) into the benchmark framework moderates the amplitude of the predicted political business cycle.

Hyperbolic Memory Discounting and the Political Business Cycle

The vintage political business cycle framework of Nordhaus (1975) represents the idea that the macroeconomic business cycle is manipulated opportunistically by an incumbent government to achieve re-election. A key assumption in this prototypical framework is that voters discount their memories about unemployment and inflation at a constant rate. Yet starting with Ebbinghaus (1885) and Jost (1897), a large body of research in psychology documents an empirical regularity that has come to be known as Jost's Second Law of Forgetting --- individuals discount recent memories at a higher rate compared to the rate at which they discount older memories. I find that incorporating this insight from psychology (i.e., hyperbolic memory discounting) into the benchmark framework moderates the amplitude of the predicted political business cycle.