Phases Of Business Cycle Research Articles

CAPITAL ACCUMULATION, VINTAGE AND PRODUCTIVITY: THE JAPANESE EXPERIENCE

We empirically examine the relationship between capital accumulation, vintage and productivity of industries in Japan using firm-level microdata. Our analyses confirm that vintage significantly influenced productivity during the period of economic expansion. The effect was particularly notable during the upturn that started in 2000, when most examined industries displayed strong vintage effects. The rejuvenation of capital equipment during this period clearly resulted from a strong productivity effect. During the economic bubble of the late 1980s, by contrast, vintage exerted no observable effects on productivity despite significant increase in investment. This finding shows that an increase in capital stock during this period was not necessarily productive and likely produced a merely temporary boom. We reconfirm that the relation between vintage and productivity changed in subtle ways in response to the phases of business cycles.

Assessing nowcast accuracy of US GDP growth in real time: the role of booms and busts

In this paper, we reassess the forecasting performance of the Bayesian mixed-frequency model suggested in Carriero et al. (2015) in terms of point and density forecasts of the GDP growth rate using US macroeconomic data. Following Chauvet and Potter (2013), we evaluate the forecasting accuracy of the model relative to a univariate AR(2) model separately for expansions and recessions, as defined by the NBER business cycle chronology, rather than relying on a comparison of forecast accuracy over the whole forecast sample spanning 1985Q1–2011Q3. We find that most of the evidence favouring the more sophisticated model over the simple benchmark model is due to relatively few observations during recessions, especially those during the Great Recession. In contrast, during expansions, the gains in forecasting accuracy over the benchmark model are at best very modest. This implies that the relative forecasting performance of the models varies with business cycle phases. Ignoring this fact results in a distorted picture, the relative performance of the more sophisticated model in comparison with the naive benchmark model tends to be overstated during expansions and understated during recessions.

Investor herding behaviour in globally listed shipping stocks

ABSTRACTThis study undertakes one of the first empirical attempts to investigate and contribute a set of innovative findings to investor herding behavior and herding spillover effects in globally listed shipping company stock returns. Distinguishing between OECD and Non-OECD markets, herding behavior is tested on a diversified set of shipping companies traded in international equity markets, over different business cycle phases, financial crises, and external shocks. A set of dynamic models, well established in the relevant behavioral finance literature, is implemented. Empirical evidence indicates investor herding behavior in shipping stock returns and herding spillover effects between different shipping sectors, albeit not robust in all cases. These challenging findings can have a material impact on efficient investment and financing decisions of shipping market players.

Duration Dependence, Monetary Policy Asymmetries, and the Business Cycle

We produce business cycle chronologies for U.S. states and evaluate the factors that change the probability of moving from one phase to another. We find strong evidence for positive duration dependence in all business cycle phases but find that the effect is modest relative to other state- and national-level factors. Monetary policy shocks also have a strong influence on the transition probabilities in a highly asymmetric way. The effect of policy shocks depends on the current state of the cycle as well as the sign and size of the shock.

When is the Fiscal Multiplier High? A Comparison of Four Business Cycle Phases

This paper compares the effect of fiscal spending on economic activity across four phases of the business cycle. We show that the fiscal multiplier is higher when unemployment is increasing than when it is decreasing. Conversely, fiscal multipliers do not depend on whether the unemployment rate is above or below its long-term trend. This result emerges both in the analysis of long time-series at the U.S. national level as well as for a post-Vietnam War panel of U.S. states. Our findings synthesize previous, at times conflicting, evidence on the state-dependence of fiscal multipliers and imply that fiscal intervention early on in economic downturns is most effective at stabilizing output.

Government Deficit Shocks and Okun's Coefficient Volatility: New Insights on the Austerity Versus Growth Debate

This paper connects two salient economic features: (i) Fiscal shocks have asymmetric effects across business cycle phases (Gechert et al., 2019); (ii) Okun's coefficient is time varying and may be unstable. The intertwined dynamic behavior of fiscal shocks and unemployment-output trade-offs are studied in this paper using state-of-the-art TVP-VAR modelling techniques applied to the analysis of six selected economies: France, Japan, Spain, Sweden, the United Kingdom (UK), and the Unites States of America (USA). We confirm the heterogeneity of Okun's coefficient across country, and its time-varying nature across time, showing in addition its fluctuation around a reference long-run value. We document a significant short-run impact of fiscal shocks on Okun's trade-off which, based on the experience of the Global Financial Crisis, becomes larger in periods of economic turmoil. Okun's coefficient is most volatile in Spain and most stable in Sweden and Japan, with France, UK and USA in between. Policy wise, we claim that austerity policies may have unexpected adverse effects on job creation if implemented during slumps, precisely when the labor market sensitivity with respect to the performance of the product market is likely to be more acute.

Sectoral dynamics and business cycles

I construct an index of sectoral dynamics to characterize changes in the sectoral composition of economic activity. There is evidence of asymmetry in different phases of business cycles with recessions being associated with larger changes in sectoral composition than expansions. Since the 1990s, while sectoral changes appear to be smaller and spread across more sectors, the correlation between sectoral dynamics and GDP growth is higher. I find that recession duration in the impulse response functions from a VAR of sectoral dynamics and GDP growth rate is similar to recession duration observed in the data.

Oil price collapse and challenges to economic transformation of Saudi Arabia: A time-series analysis

This paper studies the impact of oil price changes on economic growth in Saudi Arabia to measure its dependency on the crude oil sector. To this end, an On/Off threshold regression is specified to allow the oil/GDP relationship to be asymmetric, nonlinear, and time-varying with regard to the business cycle phases. Further, we empirically test the diversification hypothesis put forward by the National Transformation Program (Saudi Vision 2030) to check whether the equity-energy investment initiative could boost economic growth in Saudi Arabia. First, our findings confirm the contribution of the oil sector to economic growth in the country, but also show that the oil/Saudi economy relationship exhibits nonlinearity and threshold effects, as the impact of oil price varies per regime depending on the state of the market. Second, in line with the Vision 2030 expectations, we are in favor of transforming the economy and opening its equity market. We also quantify a positive and significant impact of equity investment on the Saudi Arabian economy. Further, this diversification route will stimulate a beneficial oil effect on the real economy.

Pro-cyclical effect of sovereign rating changes on stock returns: a fact or factoid?

ABSTRACTThis article examines the effect of changes in sovereign credit ratings and their outlook on the stock market returns of European countries at different phases of business cycle. Using standard four-factor model, it records a significant average marginal effect of credit rating announcements on stock market returns. Both magnitude and significance of the effect vary with business cycle and across announcement types. However, we do not find evidence of pro-cyclical effect of sovereign rating and outlook changes on stock returns. Our results show that stock markets react more negatively to rating downgrades in recovery phases and more positively to rating upgrades in contractionary period. Both results are statistically significant and robust to various sensitivity tests.

Modeling mechanism of economic growth using threshold autoregression models

We propose to apply a time series-based nonlinear mechanism in the threshold autoregression form in order to examine the possible relationship between economic growth rate and its potential determinants included debt-to-GDP indicator. Our approach employs threshold variables instead of exogenous variables and time series data instead of panel data to reveal the economic instruments that have determined the business cycle in European countries for the last 2 decades—starting from 1995. The purpose of the study is to reveal the mechanism of growth (measured in terms of GDP growth rate and industrial production growth rate) given different macroeconomic indicators, such as public debt, rate of inflation, interest rate, and rate of unemployment with the level of growth itself serving as the threshold variables. We identify that the monetary mechanism played an important role in diagnosing the phases of business cycle in most European economies which is in line with liberal economic policy dominating in the observed period. The initial level of debt-to-GDP ratio as its increase within the recession period was of no value for the economic growth pattern.

Wpływ cykli koniunkturalnych na działalność innowacyjną przedsiębiorstw w krajach Unii Europejskiej

Różnokierunkowe powiązania między działaniami innowacyjnymi przedsiębiorstw a fazami cykli koniunkturalnych wywołują problemy z jednoznacznym określeniem charakteru tej zależności. Głównym celem artykułu jest ocena wpływu faz cyklu koniunkturalnego na nakłady oraz na efekty działań innowacyjnych podmiotów gospodarczych. Dlatego przeprowadzono badanie aktywności innowacyjnej firm w krajach UE i w Norwegii w latach 2002–2014, zarówno w okresach recesji, jak i w czasach ożywienia gospodarczego. Empiryczna weryfikacja teoretycznych założeń potwierdziła złożony charakter relacji między działalnością innowacyjną przedsiębiorstw a cyklami koniunkturalnymi.

THEORETICAL IMPACT OF ENHANCED MUSHARAKAH MUTANAQISAH HOME FINANCING ON REAL ESTATE PRICES

This paper theoretically analyzes two alternative modes of home financing. The first mode is the conventional housing loan and the other is Enhanced Musharakah Mutanaqisah (EMM) home financing. Our results reveal the EMM based setting is superior to the conventional housing loans in at least two aspects. These are the prevention of house price inflation in all phases of economic business cycle and the smoothening of real estate cycles. This means that, under the EMM, the risk of real estate bubble formation is subdued, which should prove to be welfare improving.

Evaluating the predicting power of ordered probit models for multiple business cycle phases in the U.S. and Japan

We investigate the probability forecasting performance of a three-regime dynamic ordered probit econometric framework suitable to forecast recessions, low growth periods and accelerations for the U.S. and Japan. In a first step, we apply a non-parametric dating algorithm for the identification of these three phases along the lines of Proaño (2017). We compare the pseudo-out-of-sample forecasting skills of an otherwise standard binary dynamic probit model with a three-regime dynamic ordered probit framework by means of a rolling-window exercise combined with time-varying indicator selection. Based on a set of monthly macroeconomic and financial leading indicators, the results show the superiority of the ordered probit framework to forecast all three business cycle phases up to six months ahead under real-time conditions. Receiver operating characteristics and related summarizing statistics are applied as probability forecast evaluation measures.

Corporate Performance during Business Cycles: Evidence from Indian Manufacturing Firms

The present study is an attempt to assess the ‘probability of incurring loss’ of manufacturing firms in India during different phases of business cycles. We use data on a sample of 87 manufacturing companies for the period from 2002 to 2014 (comprising 1131 firm years). We use the panel logit model with the dependent variable derived from the return on assets to empirically test the hypothesis. Besides, we use firm-specific variables and macroeconomic variables as independent variables in the model. Firm-specific variables, namely size of the firm and interest coverage ratio and macroeconomic variables namely exchange rate, bank credit, inflation, interest rate and index of industrial production are statistically significant in predicting the probability of incurring loss of the firms during the study period. The results are important for investors, corporate houses, managers, lenders, policymakers and the research community as business cycles have a visible impact on all functional areas of an organization. Our study assumes significance because of the importance of macroeconomic variables in the strategic decision-making of the corporate sector in general and manufacturing firms in particular.

Прогнозування тренду світових цін на нафту на базі СМІ-моделі економічних циклів

This paper presents author's method to forecast price trend direction for crude oil based on CMI-model of business cycles. As crude oil is included in CRB-index, which is the average weighted prices for 19 raw materials, the price dynamics for crude oil and the index is mainly unidirectional. Therefore, the method to forecast crude oil price, which is proposed here, can be also used for CRB-index forecasting. The price trend is determined by aggregate demand, which, in turn, depends on economic growth rate, and on the phase of the U.S. business cycle. According to CMI-model, phases of business cycles are determined by the value of cumulative market imperfection for the U.S. economy (∆P). Two rules to forecast the price trend for crude oil or for CRB-index are proposed: 1) yearly price decreases between minimum and maximum values of ∆P; 2) yearly price increases between maximum and minimum values of ∆P. These rules underwent empirical testing for the time period of 1975-2017 using yearly data for the crude oil (at NYMEX, ICE). We also demonstrated empirically that relationship between phases of the U.S. business cycles and turning points for CRB-index dynamics is of critical importance for the accurate forecasting of Ukrainian business cycle. Using the US economy data, it was demonstrated that the effect of the crude oil price rise on economic growth rate depends rather on the phase of business cycle (on its critical points location), than on the absolute value of this price. As long as an economy does not reach the point of ∆P minimum (by CMI-model), crude oil price may reach its historical maximum many times without triggering a recession. At the same time, if an economy passes the point of ∆P minimum, any even comparatively small external shock will trigger a recession (even if crude oil price does not reach its historical maximum). The US economy passed through the point of local maximum starting from the fourth quarter of 2017. It means that an upward price trend for crude oil (CRB-index) has formed and will cause further acceleration of the US economy growth rate (peak of this acceleration will be reached when ∆P=0). One can expect that the upward price trend for main raw materials will last until the next US recession (until the value of ∆P become negative). Herewith, growth rates for the crude oil price are expected 1,5-2 times higher than nowadays just 6-12 months before the recession starting point (i.e. when ∆P→0). According to pessimistic scenario, the US recession may occur as early as in 2020-21. Therefore, Ukrainian economy may be growing with a rate equal to the growth rate of prices for raw materials within at least 2-3 years. However, such favorable external factors for Ukrainian economy cannot last for a long time. If the peak of payments of the national debt coincides with the US recession bottom (local minimum point), some major problems for Ukrainian economy may occur. In this case, prices for raw materials may drop by 50% and more, as a result of another exchange crash all over the world. This crash would increase significantly the probability of a new recession in Ukraine that would shorten substantially budget revenues into the national economy. Therefore, it makes sense nowadays, while monitoring the US economy conditions, to plan certain actions to provide a soft landing for the national economy in case of a global exchange crash.

Inequality Amid Income Stagnation: Italy Over the Last Quarter of a Century

The paper analyses the evolution of inequality in Italy from 1989 to 2014, focusing on three business-cycle phases: the 1992 currency crisis, the moderate growth from 1993 to 2007, and the double-dip recession from 2008 to 2013. Data from the national accounts and the Bank of Italy’s Survey on Household Income and Wealth are used. Results show that income inequality, as measured by the Gini coefficient, rose sharply during the recession of the early 1990s but much less during the recent double-dip recession, though the share of people at risk of poverty rose similarly during the two crises. The stability of (synthetic) distributive inequality measures is explained by the fact that the reduction in income during the double-dip recession hit the whole population. Despite this apparent stability, two changes stand out: the widening gap between the young and the elderly and the fact that the deterioration in living conditions was borne wholly by households whose primary earner was foreign born.

Lessons from the 2008-2009 US Banking Crisis

More than 70 per cent of the largest 1,200 US banks of 2011 avoided annual losses in 2008 or 2009 largely because their operations were controlled. Bankers, faced with unexpected reverses, worked to reestablish control and profitability. Our examination of banking’s record leading up to the 2008-2009 financial crisis indicates there were several abnormal changes bankers might have observed between 2005 and 2007 to put their organizations on alert. Such alerts before the crisis could have helped some banks minimize their losses or even avoid them. Looking ahead, bankers who apply the lessons identified, herein, should report more stable profitability during the volatile phases of future business cycles. Analysts and regulators alike should be able to use these same lessons to sort resilient banks from the rest.

The financial instability hypothesis and the paradox of debt: a microeconometric approach for Latin America*

Hyman Minsky's financial instability hypothesis (FIH) argues that as part of the normal functioning of capitalist economies robust financial structures tend to evolve into highly leveraged fragile financial structures. The paradox of debt challenges the very foundation of Minsky's FIH as it maintains that the upward and downward phases of business cycles need not be characterized by processes of respective leveraging and deleveraging. Using a panel of firm-level data and seemingly unrelated regressions we analyse the relationship between debt and investment for 12 Latin American countries for the years 2005 (expansion) and 2009 (contraction). We reject the paradox of debt in favor of the FIH, regardless of our model specification or the choice of external financing. The FIH seems to intensify in expansions with respect to recessions, and its intensification during expansions is explained by a larger fraction of firms acquiring debt and new investment projects, rather than from further leveraging for those firms already engaged in fixed investment.

Възможности за фискални и монетарни въздействия върху икономическия цикъл на България

The chances for fiscal and monetary influence on the business cycle of Bulgaria under a currency board arrangement have been analyzed. The determinants of Bulgaria’s business cycle phase and output gap from the first quarter of 2000 till the second quarter of 2017 have been identified. The effects of minimum reserve requirements, fiscal balance, government revenue, government expenditure and government debt on the business cycle phase and the output gap have been studied. Two research methods have been employed – logistic regression and ordinary least squares regression of times series data. The study results imply that all mentioned variables except for government debt have a statistically significant impact on the output gap. The business cycle phase is significantly affected by all mentioned variables with the exception of government expenditure.

Inference on Filtered and Smoothed Probabilities in Markov-Switching Autoregressive Models

ABSTRACTWe derive a statistical theory that provides useful asymptotic approximations to the distributions of the single inferences of filtered and smoothed probabilities, derived from time series characterized by Markov-switching dynamics. We show that the uncertainty in these probabilities diminishes when the states are separated, the variance of the shocks is low, and the time series or the regimes are persistent. As empirical illustrations of our approach, we analyze the U.S. GDP growth rates and the U.S. real interest rates. For both models, we illustrate the usefulness of the confidence intervals when identifying the business cycle phases and the interest rate regimes.