Observed Business Cycles Research Articles

A Real-Business-Cycle model with energy use: Lessons for Bulgaria (1999-2018)


 
 
 We introduce energy as a productive input into a real-business-cycle model with government sector. We calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2018). We investigate the quantitative importance of the presence of energy, and the potential relevance of energy price shocks as driving forces behind the observed business cycle fluctuations in Bulgaria. In particular, a positive shock to energy prices in the model works like a negative technological shock. Allowing for the presence of energy as a factor of production does not substantially improves the model performance against data, and is thus an unlikely driver of business cycle fluctuations in Bulgaria.
 
 

An endogenous mechanism of business cycles

This paper suggests that business cycles may be a manifestation of coupled real economy and stock market dynamics and describes a mechanism that can generate economic fluctuations consistent with observed business cycles. To this end, we seek to incorporate into the macroeconomic framework a dynamic stock market model based on opinion interactions (Gusev et al., 2015). We derive this model from microfoundations, provide its empirical verification, demonstrate that it contains the efficient market as a particular regime and establish a link through which macroeconomic models can be attached for the study of real economy and stock market interaction. To examine key effects, we link it with a simple macroeconomic model (Blanchard, 1981). The coupled system generates nontrivial endogenous dynamics, which exhibit deterministic and stochastic features, producing quasiperiodic fluctuations (business cycles). We also inspect this system’s behavior in the phase space. The real economy and the stock market coevolve dynamically along the path governed by a stochastically-forced dynamical system with two stable equilibria, one where the economy expands and the other where it contracts, resulting in business cycles identified as the coherence resonance phenomenon. Thus, the incorporation of stock market dynamics into the macroeconomic framework, as presented here, allows the derivation of realistic behaviors in a tractable setting.

Learning from House Prices: Amplification and Business Fluctuations

AbstractWe formalize the idea that house price changes may drive rational waves of optimism and pessimism in the economy. In our model, a house price increase caused by aggregate disturbances may be misinterpreted as a sign of higher local permanent income, leading households to demand more consumption and housing. Higher demand reinforces the initial price increase in an amplification loop that drives comovement in output, labour, residential investment, land prices, and house prices even in response to aggregate supply shocks. The qualitative implications of our otherwise frictionless model are consistent with observed business cycles and it can explain the economic impact of apparently autonomous changes in sentiment without resorting to non-fundamental shocks or nominal rigidity.

How quantitatively important is public investment for both business cycle fluctuations and output growth in Bulgaria (1999–2018)?

ABSTRACT We introduce government investment into a real-business-cycle setup. We calibrate the model to Bulgarian data for the period 1999–2018. We then proceed to quantitatively evaluate the effect of the public capital accumulation channel as a tool for business cycle propagation, as well the importance of public investment spending on output growth. Government investment shocks, in the absence of other technological disturbances, turn out to be unable to account for observed business cycles in Bulgaria. On the other hand, government investment may be able to increase subsequent output growth, but that effect is estimated to be quite small.

An optimal equilibrium for a reformulated Samuelson economic discrete time system

This paper studies the equilibrium of an extended case of the classical Samuelson’s multiplier–accelerator model for national economy. This case has incorporated some kind of memory into the system. We assume that total consumption and private investment depend upon the national income values. Then, delayed difference equations of third order are employed to describe the model, while the respective solutions of third-order polynomial correspond to the typical observed business cycles of real economy. We focus on the case that the equilibrium is not unique and provide a method to obtain the optimal equilibrium.

An Endogenous Mechanism of Business Cycles

This paper suggests that business cycles may be a manifestation of coupled real economy and stock market dynamics and describes a mechanism that can generate economic fluctuations consistent with observed business cycles. To this end, we seek to incorporate into the macroeconomic framework a dynamic stock market model based on opinion interactions (Gusev et al., 2015). We derive this model from microfoundations, provide its empirical verification, demonstrate that it contains the efficient market as a particular regime and establish a link through which macroeconomic models can be attached for the study of real economy and stock market interaction. To examine key effects, we link it with a simple macroeconomic model (Blanchard, 1981). The coupled system generates nontrivial endogenous dynamics, which exhibit deterministic and stochastic features, producing quasiperiodic fluctuations (business cycles). We also inspect this system’s behavior in the phase space. The real economy and the stock market coevolve dynamically along the path governed by a stochastically-forced dynamical system with two stable equilibria, one where the economy expands and the other where it contracts, resulting in business cycles identified as the coherence resonance phenomenon. Thus, the incorporation of stock market dynamics into the macroeconomic framework, as presented here, allows the derivation of realistic behaviors in a tractable setting.

Frictional Coordination

The notion that business cycles are driven by fluctuations in aggregate demand is subtle. I first review some of the conceptual and empirical challenges faced when trying to accommodate this notion in micro-founded, general-equilibrium models. I next review my own research, which sheds new light on the observed business cycles by accommodating frictional coordination in the form of higher-order uncertainty. This makes room for forces akin to animal spirits even when the equilibrium is unique. It allows demand shocks to generate realistic business cycles even when nominal rigidity is absent or undone by appropriate monetary policy. It modifies the general-equilibrium predictions of workhorse macroeconomic models in manners that seem both conceptually appealing and empirically relevant. And it offers new guidance to policy.

Forecasting with DSGE models: What frictions are important?

DSGE models are extensively used for policy analysis and research. In order to match the observed business cycle facts, the models were enriched with various nominal and real rigidities. In this paper we assess the importance of DSGE frictions from the perspective of forecasting accuracy. Our main finding establishes that not all these mechanisms are necessary: different frictions are identified to be relevant for certain variables and forecast horizons, but not for others. The baseline model featuring all frictions is found to be dominated by its restricted versions. The models with constant capital utilization rate and with reduced habits in preferences improve forecasting accuracy for GDP and consumption. This result is at variance with previous literature, where variable capital utilization and strong habits were found useful for fitting the data. We confirm sticky prices and sticky wages to be important rigidities, since the models with flexible prices and wages are inferior at predicting nominal variables. Altogether, our results suggest that policy-makers need a rich forecasting platform in order to take fully-informed decisions.

Business Cycles in European Post-Communist Countries

The European post-communist countries that have integrated into the European Union are emerging market economies. However, their short-run economic performance does not correspond to the observed business cycles of other global emerging markets. The business cycles of the studied countries are longer, and their recessions are more pronounced. Moreover, economic activity in the studied countries is relatively low and volatile, and the trade balance and government purchases have a relatively significant countercyclical character. These are the core conclusions from our business cycle study of the chosen European post-communist countries. In the study, we use both traditional and contemporary business cycle definitions. Using traditional definitions, we determine the peaks, troughs, expansions and contractions and quantify the durations and amplitudes of their expansions, recessions and business cycles. Using contemporary definitions, we measure cyclical properties by computing the first and second moments of the chosen macroeconomic cyclical components and growth rates. Differences in the business cycles and characteristics between European post-communist countries and other emerging countries are discussed with reference to the works of other authors.

Endogenous Money Supply and the Business Cycle

This paper documents changes in the cyclical behavior of nominal data series that appear after 1979:IIIQ, when the Federal Reserve implemented a policy to end the acceleration of inflation. Such changes were not apparent in real variables. A business cycle model with impulses to technology and a role for money is used to show how alternative money supply rules ·are expected to affect observed business cycle facts. In this model, changes in the money supply rules have almost no effect on the cyclical behavior of real variables, yet have a significant impact on the cyclical nature of nominal variables. Computational experiments with alternative policy rules suggest that the change in monetary policy in 1979 may account for the sort of instability observed in the U.S. data.

Editors’ Introduction

Editors’ Introduction

The Delay Effect in a Stochastic Multiplier–Accelerator Model

Abstract This paper extends the classical Samuelson multiplier–accelerator model for national economy. Actually, this new modeling structure removes the basic shortcoming of the original model producing stable business cycles when realistic values of the parameters (multiplier, accelerator) are entered into the system of equations. Under this new approach, we introduce some kind of randomness and memory into the system. We assume that consumption, private investment and governmental expenditure depend upon the national income values of the last n ( n > 1 ) years and further assume that multiplier and accelerator factors are stochastic variables. Then stochastic delayed difference equations of higher order are employed to describe the model, while the respective solutions of higher order polynomials for the expectation of national income variables correspond to the typical observed business cycles of real economy. Stability and controllability conditions are investigated while numerical examples provide further insight and better understanding as regards the control actions, system design, and produced business cycles.

Teaching Business Cycles with the IS-TR Model

Business cycles are an essential part of macroeconomics. However, the study of macroeconomics often ignores the observed business cycles. During and after the global financial crisis, several economists have emphasized that macroeconomics courses will have to be changed. This paper presents a real world application of the IS-TR model, which helps to explain and teach business cycles. The simple Keynesian model clearly explains output fluctuations and the conduct of monetary policy. The main reason for strong business cycles in the euro area has been shocks in the goods market. The European Central Bank has changed its main interest rate mainly as a reaction to changes in the output gap.

Employment adjustment in German firms

Using a representative establishment data set for Germany, I show that, in line with the existing literature for several countries, firms’ adjustment costs for employment are characterized by a fixed and convex functional form. Furthermore, they are asymmetric with dismissal costs exceeding hiring costs. An analysis of firms’ adjustment in the period 1996–2010 also indicates that adjustment behavior has changed over time. Comparing the employment adjustment in the two observed business cycles comprising the years 1996–2003 and 2004–2010, I find that the adjustment speed was higher in the second business cycle indicating that adjustment costs have fallen in recent years.

Business cycle variation in the risk-return trade-off

In the United States and other Organisation for Economic Co-operation and Development (OECD) countries, the expected returns on stocks, adjusted for volatility, are much higher in recessions than in expansions. We consider feasible trading strategies that buy or sell shortly after business cycle turning points that are identifiable in real time and involve holding periods of up to 1 year. The observed business cycle changes in expected returns are not spuriously driven by changes in expected near-term dividend growth. Our findings imply that value-maximizing managers face much higher risk-adjusted costs of capital in their investment decisions during recessions than expansions.

Observing Shocks

Macroeconomists have observed business cycle fluctuations over time by constructing and manipulating models in which shocks have increasingly played a greater role. Shock is a term of art that pervades modern economics appearing in nearly one-quarter of all journal articles in economics and in nearly half in macroeconomics. Surprisingly, its rise as an essential element in the vocabulary of economists can be dated only to the early 1970s. We trace the history of shocks in macroeconomics from Ragnar Frisch and Eugen Slutsky in the 1920s and 1930s through real business cycle and DSGE models and to the use of shocks as generators of impulse-response functions, which are in turn used as data in matching estimators. The history is organized around the observability of shocks. As well as documenting a critical conceptual development in economics, the history of shocks shows that James Bogen and James Woodward’s distinction between data and phenomena must be substantially relativized if it is to be at all plausible.

Firm Growth, European Industry Dynamics and Domestic Business Cycles

AbstractBased on the empirical firm growth literature and on heterogeneous (microeconomic) adjustment models, this paper empirically investigates the impact of European industry fluctuations and domestic business cycles on the growth performance of European firms. Since the implementation of the Single Market Program the 27 EU member states share a common market. Accordingly, the European industry business cycle is expected to become a more influential predictor of European firms’ behavior at the expense of domestic fluctuations. Empirically, the results of a two‐part model for a sample of European manufacturing firms reject this hypothesis. In addition, exporting firms and subsidiaries of multinational enterprises constitute the most stable firm cohort throughout the observed business cycle.

CONSUMPTION–LEISURE TRADE‐OFFS AND PERSISTENCY IN BUSINESS CYCLES

ABSTRACTThis paper studies whether non‐separabilities between consumption and leisure may help to explain the observed persistence in GNP growth. We consider an extended version of Lucas's (1988) human capital investment model that includes labour adjustment costs and compare its performance under different utility specifications with different degrees of complementarity and substitutability between consumption and leisure. We find that when consumption and leisure are complements the model succeeds in matching not only the autocorrelation of output growth but also the important trend‐reverting component found in US data. These results hold even if low adjustment costs of labour are considered. Hence, we conclude that an arguably simple margin not considered conventionally can provide useful insights into observed business cycle patterns.

Investment shocks and the comovement problem

Recent work based on sticky price–wage estimated dynamic stochastic general equilibrium (DSGE) models suggests investment shocks are the most important drivers of post-World War II US business cycles. Consumption, however, typically falls after an investment shock. This finding sits oddly with the observed business cycle comovement where consumption, along with hours-worked and investment, moves with economic activity. We show that this comovement problem is resolved in an estimated DSGE model when (i) the cost of capital utilization is specified in terms of increased depreciation of capital, as originally proposed by Greenwood et al. (1988) in a neoclassical setting, or (ii) there is no wealth effect on labor supply. The data, however, favors the first channel. Traditionally, the cost of utilization is specified in terms of forgone consumption following Christiano et al. (2005), who studied the effects of monetary policy shocks. The alternative specification we consider has two additional implications relative to the traditional one: (i) it has a substantially better fit with the data and (ii) the contribution of investment shocks to the variance of consumption is over three times larger. The contributions to output, investment, and hours, are also relatively higher, suggesting that these shocks may be quantitatively even more important than previous estimates based on the traditional specification.

Business Cycle Variation in the Risk-Return Trade-Off

In the United States and other Organisation for Economic Co-operation and Development (OECD) countries, the expected returns on stocks, adjusted for volatility, are much higher in recessions than in expansions. We consider feasible trading strategies that buy or sell shortly after business cycle turning points that are identifiable in real time and involve holding periods of up to one year. The observed business cycle changes in expected returns are not spuriously driven by changes in expected near-term dividend growth. Our findings imply that value-maximizing managers face much higher risk-adjusted costs of capital in their investment decisions during recessions than expansions.