Phases Of Business Cycle Research Articles

A comparative study of metaphors representing the US and Japanese economies

This paper examines the usefulness of metaphors by comparing the assessments of the current economic conditions of the US and Japan made by the countries’ respective monetary policy authorities. In particular, this paper compares the role played by metaphors in creating a technical lexicon for business cycle phases in each language, and presents three main empirical findings. First, in both the US and Japan, metaphors are used in keeping with the business cycle phases with which each economy is faced. Second, many of the verbal, adjectival and adverbial terms can be attributed solely to the mechanical metaphor in the US, while there is no incidence of this use in the case of Japan. Third, there are more metaphoric adjectives or adverbs in the assessments of the US economy than in those of the Japanese economy. These empirical findings can be useful for second language instruction in economics.

Business cycle asymmetries in Turkey: an application of Markov-switching autoregressions

This paper examines business cycle characteristics of the Turkish economy in the liberalization (post-1980) period using a Markov-switching Autoregressive (MSAR) model framework. The importance of the model selection process is emphasized in an extensive search for the appropriate MS model. The business cycle properties are found to be very sensitive to the state dimension, the choice of the MS model (classified according to regime-dependent parameters) and the autoregressive lag order. The chosen two-regime MS model suggests four recessionary and five expansionary phases in the post-1980 period. Business cycle phases are found to be asymmetric with the probability of switching from a recession to expansion exceeding the probability of switching from expansion to recession. The paper also provides evidence on the usefulness of a non-linear model as compared with a linear alternative in the context of business cycle research in an emerging economy using various parametric and non-parametric tests. Non-linear and linear models are compared and evaluated using kernel density and conditional expectation estimates by simulating data from respective models.

Corporate Investment, Taxation, and Tobin's Q: Evidence from Japanese Firms and Industries

The paper addresses a question of how taxation affects the cost of capital of firms and the value of firms as measured by Tobin's q. We construct a type of Real Business Cycle model and derive our original unlevered q on an after tax base after removing the financial tax shield effects in order to clearly distinguish between the real operating profitability of firms and their financing decisions. Our model is an extended version of the two-sector model originally developed by Christiano and Fisher (1995) and can incorporate both corporate taxation and individual taxation. In our model both homogenous expectations in the capital market and labor immobility are assumed as in Christiano and Fisher and the unlevered q-value is derived from our partial equilibrium solutions. Some comparative static results are demonstrated and model predictions are presented. In a latter empirical part of our paper, we investigate how the unlevered after-tax q-values versus the conventional Tobin's q vary between the two business sectors in Japan according to the differences in the marginal tax rates and the leverage ratios of firms as well as over the different phases of business cycles. Overall, the data supports the model predictions and rationalizes the use of our unlevered q.

Reassessing Cyclical Changes in Workers' Labor Market Status: Gross Flows and the Types of Workers Who Determine Them

This analysis, using Current Population Survey data, yields statistically compelling evidence that cyclical variations in gross flows of U.S. workers—that is, variations by business cycle phase in the number of workers transitioning from one labor market state to another each month—were substantially smaller in 1986–2005 than in 1968–86. The authors identify six types of workers who would be expected to contribute to cyclical variations in these flows. Counter-intuitively, one such group consists of individuals whose decisions to enter or exit the labor force are independent of labor market conditions. Estimates suggest that these “noncyclical movers” are an empirically important component of gross flows into the labor force. The authors contend that the presence of noncyclical movers precludes accurate measurement of the contributions of workers whose entry and exit decisions are consciously influenced by labor market conditions.

An Analysis of the Conditional Volatility Dynamics of the Australian Business Cycle

In this paper, we analyse the conditional variance of the Australian real gross domestic product (GDP) and the expenditure components by a variety of generalised autoregressive conditional heteroskedasticity (GARCH) models. First, we test the plausibility of the constant-correlation assumption by employing Tsei¯s (2000) Lagrange Multiplier (LM) test and the Bera and Kimi¯s (2002) Information Matrix (IM) test. Our results indicate that the correlations among the shocks to real GDP and its various expenditure components are invariant over time. In addition, these shocks are not highly correlated with one another. Second, we examine if volatility asymmetry exists in the Australian business cycle by proposing four bivariate asymmetric GARCH specifications. Except for the case of gross fixed capital formation, the evidence of asymmetric conditional volatility in the growth rates of the Australian real GDP and the other components is weak. Despite the weak evidence of asymmetric volatility, higher volatility is generally associated with the contractionary phase of the Australian business cycle. This finding has important implications for macroeconomic policy and forecasting for business cycle.

Duration dependence in US business cycles: An analysis using the modulated power law process

The modulated power law process is used to analyze the duration dependence in US business cycles. The model makes less restricting assumptions than traditional models do and measures both the local and global performance of business cycles. The results indicate evidence of positive duration dependence in the U.S. business cycles. Structural change after WWII in both expansion and contraction phases of business cycles is also documented. Hypothesis tests confirm that the model fits US business cycles.

Business cycle dynamics with duration dependence and leading indicators

Durland and McCurdy [Durland, J.M., McCurdy, T.H., 1994. Duration-dependent transitions in a Markov model of US GNP growth. Journal of Business and Economic Statistics 12, 279–288] investigated the issue of duration dependence in US business cycle phases using a Markov regime-switching approach, introduced by Hamilton [Hamilton, J., 1989. A new approach to the analysis of time series and the business cycle. Econometrica 57, 357–384] and extended to the case of variable transition parameters by Filardo [Filardo, A.J., 1994. Business cycle phases and their transitional dynamics. Journal of Business and Economic Statistics 12, 299–308]. In Durland and McCurdy’s model duration alone was used as an explanatory variable of the transition probabilities. They found that recessions were duration dependent whilst expansions were not. In this paper, we explicitly incorporate the widely-accepted US business cycle phase change dates as determined by the NBER, and use a state-dependent multinomial Logit modelling framework. The model incorporates both duration and movements in two leading indexes – one designed to have a short lead (SLI) and the other designed to have a longer lead (LLI) – as potential explanatory variables. We find that doing so suggests that current duration is not only a significant determinant of transition out of recessions, but that there is some evidence that it is also weakly significant in the case of expansions. Furthermore, we find that SLI has more informational content for the termination of recessions whilst LLI does so for expansions.

Identifying Asymmetry in the Language of the Beige Book: A Mixed Data Sampling Approach

Studies of the predictive ability of the Federal Reserve's Beige Book, an anecdotal measure of regional economic conditions, for aggregate output and employment have proven inconclusive. This might be attributed, in part, to the irregular release schedule of the Beige Book. In this paper, we use a model that allows for data sampling at mixed frequencies to analyze the predictive power of the Beige Book for both aggregate and regional data. We find that the Beige Book's national summary predicts GDP and aggregate employment, but that the information content in the district reports for regional employment is mixed. In addition, there appears to be an asymmetry in the predictive content of the Beige Book language. At the national level, pessimistic language in the national summary reflects the underlying business cycle phase, while optimistic language is informative for higher frequency fluctuations. At the district level, the reverse is true; pessimistic language reflects sharp, temporary economic fluctuations.

The Dynamic Relationship between Permanent and Transitory Components of U.S. Business Cycles

This paper investigates the dynamic relationship between permanent and transitory components of post‐war U.S. business cycles. We specify a time‐series model for real GNP and consumption in which the two share a common stochastic trend and transitory component, and Markov‐regime switching is used to model business cycle phases in these components. The timing of switches between business cycle phases is allowed to differ across the permanent and transitory components. We find strong evidence of a lead‐lag relationship between the switches in the two components. Specifically, switches in the permanent component leads switches in the transitory component when entering recessions.

Similarities and convergence in G-7 cycles

This paper examines the properties of G-7 cycles using a multicountry Bayesian panel VAR model with time variations, unit specific dynamics and cross-country interdependences. We demonstrate the presence of a significant world cycle and show that country specific indicators play a much smaller role. We detect differences across business cycle phases but, apart from an increase in synchronicity in the late 1990s, find little evidence of major structural changes. We also find no evidence of the existence of a Euro specific cycle or of its emergence in the late 1990s.

Regional Business Cycle Phases in Japan

This paper uses a Markov-switching model with structural breaks to characterize and compare regional business cycles in Japan for 1976-2005. An early 1990s structural break meant a reduction in national and regional growth rates in expansion and recession, usually resulting in an increase in the spread between the two phases. Although recessions tended to be experienced across a majority of regions throughout the sample period, the occurrence and lengths of recessions at the regional level have increased over time.

Capital structure, credit risk, and macroeconomic conditions

This paper develops a framework for analyzing the impact of macroeconomic conditions on credit risk and dynamic capital structure choice. We begin by observing that when cash flows depend on current economic conditions, there will be a benefit for firms to adapt their default and financing policies to the position of the economy in the business cycle phase. We then demonstrate that this simple observation has a wide range of empirical implications for corporations. Notably, we show that our model can replicate observed debt levels and the countercyclicality of leverage ratios. We also demonstrate that it can reproduce the observed term structure of credit spreads and generate strictly positive credit spreads for debt contracts with very short maturities. Finally, we characterize the impact of macroeconomic conditions on the pace and size of capital structure changes, and debt capacity.

A useful tool for forecasting the Euro-area business cycle phases

Based on a novel extension of existing multivariate Markov-switching models, we provide the reader with a useful tool for analyzing current business conditions and making predictions about the future state of the Euro-area economy in real time. Apart from the Industrial Production Index, we find that the European Commission Industrial Confidence Indicator, which is issued with no delay, is very useful for constructing the real-time predictions.

Regional Business Cycle Phases in Japan

This paper uses a Markov-switching model with structural breaks to characterize and compare regional business cycles in Japan for 1976-2005. An early 1990s structural break meant a reduction in national and regional growth rates in expansion and recession, usually resulting in an increase in the spread between the two phases. Although recessions tended to be experienced across a majority of regions throughout the sample period, the occurrence and lengths of recessions at the regional level have increased over time.

The Dynamics of the Permanent and Transitory Components in International Business Cycles

This paper proposes a generalized multivariate framework to measure the significance of common permanent and transitory components in international business cycle fluctuations. I employ a multivariate unobserved components model with Markov regime switching to investigate the nonlinear dynamics of permanent and transitory components that are common across G7 real GDP series. The common components are modeled to exhibit different behavior in the expansion and recession phases of international business cycles. I find that, in contrast to the individual country's business cycles, the international business cycle does not exhibit classical recession and expansion phases. The international permanent component has two phases: a high-growth phase and a low-growth phase, and there is no evidence of a Friedman's pluck type recessionary period in the international transitory component. The switch from a high-growth regime to a low-growth regime occurs in the second quarter of 1973. There are no further switches that occur from one regime to the other. Among the seven developed nations examined, Japan is the most sensitive and Germany is the least sensitive to international permanent shocks.

Towards a Monthly Business Cycle Chronology for the Euro Area

This paper is an exercise in dating the Euro area business cycle on a monthly basis. Using a quite flexible interpolation routine, we construct several monthly series of Euro area real GDP, and then apply the Bry-Boschan (1971) procedure. To account for the asymmetry in growth regimes and duration across business cycle phases, we propose to extend this method with a combined amplitude/phase-length criterion ruling out expansionary phases that are short and flat. Applying the extended procedure to US and Euro area data, we are able to replicate approximately the dating decisions of the National Bureau of Economic Research (NBER) and the Centre for Economic Policy Research (CEPR).

The Industry Effects of Monetary Policy in the Euro Area

We first estimate the effects of a euro area-wide monetary policy change on output growth in eleven industries of seven euro area countries over the period 1980–98. On average the negative effect of an interest rate tightening on output is significantly greater in recessions than in booms. There is, however, considerable cross-industry heterogeneity in both the overall policy effects and the degree of asymmetry across the two business cycle phases. We then explore which industry characteristics can account for this cross-industry heterogeneity. Differences in the overall policy effects can mainly be explained by the durability of the goods produced in the sector. This can be regarded as evidence for the conventional interest rate/cost-of-capital channel. In contrast, differences in the degree of asymmetry of policy effects are related to differences in financial structure, in particular the maturity structure of debt, the coverage ratio, financial leverage and firm size. This suggests that financial accelerator mechanisms can partly explain cross-industry differences in asymmetry.

Do central banks act asymmetrically? Empirical evidence from the ECB and the Bank of England

The paper attempts to exploit whether monetary authorities have a different behaviour during recession and expansion. To this end, a multivariate extension of Hamilton Markov-switching model is adopted. First, regime dependent Taylor-type rules are estimated for the Euro Area and the United Kingdom in order to capture the systematic behaviour of central banks. Then, impulse response functions that account for the different phases of the business cycle are analysed. In addition, a comparative analysis concerning the estimated rules as well as the different reaction of real economy to monetary shocks is implemented. The study strongly suggests that central banks cannot neglect the regime where the monetary action takes place. It follows that the phase of business cycle is an important matter in monetary policy decision process.

Product Market Performance, Switching Costs, and Liquidation Values: The Real Effects of Financial Leverage

We model the interaction of product market competition and firms' financing decision when firms face capital market imperfections and consumers face switching costs. In our model, consumers anticipate that capital market frictions may drive their supplier out of business and account for welfare losses that firm bankruptcy imposes upon them. Likewise, managers, when investing in long-term market share building, take into account the possibility of business failure and the residual value they may capture from the firm's liquidation process. Our theory yields four central implications. In response to a negative shock to demand: (1) more leveraged firms will experience significant market share losses; (2) the market share losses of more leveraged firms will be more pronounced in industries where low debt usage is the norm; (3) the market share losses of more leveraged firms will be more pronounced in industries where consumers face higher switching costs; and (4) the market share losses of more leveraged firms will be magnified in industries where asset liquidation is less efficient. Using detailed firm- and industry-level data from U.S. manufacturers over the 1990-91 recession, we present empirical evidence supporting our model's predictions. We later expand our empirical analysis, studying a large panel of firms over the various phases of the full business cycles contained in the 1976-96 period. Results from these broader tests provide additional evidence in support of our theory.

Power law tails in the Italian personal income distribution

We investigate the shape of the Italian personal income distribution using microdata from the Survey on Household Income and Wealth, made publicly available by the Bank of Italy for the years 1977–2002. We find that the upper tail of the distribution is consistent with a Pareto-power law type distribution, while the rest follows a two-parameter lognormal distribution. The results of our analysis show a shift of the distribution and a change of the indexes specifying it over time. As regards the first issue, we test the hypothesis that the evolution of both gross domestic product and personal income is governed by similar mechanisms, pointing to the existence of correlation between these quantities. The fluctuations of the shape of income distribution are instead quantified by establishing some links with the business cycle phases experienced by the Italian economy over the years covered by our dataset.