Phases Of Business Cycle Research Articles

Credit market conditions, expected return proxies, and bank stock returns

We evaluate the performance of expected return proxies during extreme credit market conditions and extreme phases of business cycles when realized returns on banks stocks are large in absolute value. We construct three sets of expected return proxies for individual bank stocks: (i) characteristic-based proxies; (ii) standard risk-factor-based proxies; and (iii) risk-factor-based proxies in which betas depend on firm characteristics. Based on the newly developed minimum error variance (MEV) criterion (Lee et al., 2020), the best performing expected return proxy is the risk-factor-based model that allows betas to vary with firm characteristics. We also examine whether these three expected return proxies can capture actual returns during either extreme credit market or extreme business-cycle conditions. We find that both risk-factor-based proxies explain returns better than characteristic-based proxies during these periods.

Credit creation, credit destruction and credit reallocation: Firm-level evidence from India

The rapidly growing empirical studies find that reallocating physical and financial input across and within firms can be an essential productivity growth source. This paper examines the process of credit reallocation across Indian businesses by applying the methodology proposed by Davis & Haltiwanger (1992) for measuring job reallocation. Using the unique firm-level dataset for over 30 years, we find that substantial gross credit flows are masked by underlying net credit growth at any business cycle phase. Our results reveal that credit reallocation is intense, and the majority of credit reallocation occurs within a group of firms similar in size, governance, or industry. We also find that credit destruction is more volatile than credit creation, and excess reallocation fluctuates countercyclically over the business cycle. The findings suggest that heterogeneity in credit market dynamics is a prime source of credit reallocation evolution.

Analysis of the Current Situation of Female Employment from a Macroeconomic Perspective: A Case Study of Female Employment During COVID-19

The underlying causes of the relative economic downturn in all parts of the world since the outbreak of COVID-19 (Coronavirus Disease 2019) deserve deeper scrutiny. This paper focuses on the employment situation of women during the above-mentioned period, including a comparison between the extent to which non-cyclical economic downturns have affected employment for both sexes and the impact of COVID-19 on macroeconomic policies by using qualitative research. This paper first judges COVID-19 to be fundamentally different from the downward economic phase of the traditional business cycle, and then it considers the opportunities and pressures on women's employment from a variety of factors, including supply and demand. The paper also discusses in detail the ways in which women were able to find employment during the epidemic, so as to provide an effective and reliable basis and reference for the formulation of national macroeconomic policies and the recovery of national production. It can be concluded that female employment is more significantly affected by the macro environment, and without formulating correct macro policies, it is impossible to bring about the recovery of female employment.

Assessing the effect of trade and FDI on growth-unemployment nexus

Research background: Unemployment is a huge topic for policymakers, scholars, and, in general, society. Historically, there have always been a lot of discussions about this phenomenon. It is already acknowledged that unemployment is closely related to economic activity: when the economy is growing, more people are employed, and when economic activity is low, employment decreases, and unemployment rises. This relation is well-researched in the framework of Okun’s law. However, it is far less known how this relationship holds if international economic relations are introduced. Thus, the motivation for the research was to examine the role of international trade and foreign direct investment (FDI) on the growth-unemployment nexus. Purpose of the article: To assess how trade and FDI affect growth and gender-, age-, and educational attainment level-specific unemployment relationship and on what scale this effect varies over different business cycle phases. Methods: Scientific literature review, comparative analysis, and panel regression. Findings & value added: Given the lack of research examining what effect FDI and trade have on the growth-unemployment nexus, this paper estimates modified Okun’s equation on the European Union (EU) countries (EU–28, by the composition of the EU until 31/01/2020) for the period from 2000 to 2019 while incorporating international aspects that can have an impact on this nexus. Also, this study develops a specification that can be useful to monitor the potentially different effects of FDI and trade on the growth-unemployment nexus during different business cycle phases. The estimations of the panel regression for unemployment disaggregated by age, gender and education level has showed that import, export, inward FDI, and outward FDI have a negative effect on the growth-unemployment nexus. It means that with an increase in the intensity of international economic relations, the influence of gross domestic product (GDP) growth on unemployment becomes less significant. Thus, the effectiveness of expansionary fiscal policy to reduce unemployment becomes less effective in more open economies, which in the case of the EU are the smallest member states with relatively small domestic markets.

Addressing Concerns about Single Path Analysis in Business Cycle Turning Points: The Case of Learning Vector Quantization

Data-driven approaches in machine learning are increasingly applied in economic analysis, particularly for identifying business cycle (BC) turning points. However, temporal dependence in BCs is often overlooked, leading to what we term single path analysis (SPA). SPA neglects the diverse potential routes of a temporal data structure. It hinders the evaluation and calibration of algorithms. This study emphasizes the significance of acknowledging temporal dependence in BC analysis and illustrates the problem of SPA using learning vector quantization (LVQ) as a case study. LVQ was previously adapted to use economic indicators to determine the current BC phase, exhibiting flexibility in adapting to evolving patterns. To address temporal complexities, we employed a multivariate Monte Carlo simulation incorporating a specified number of change-points, autocorrelation, and cross-correlations, from a second-order vector autoregressive model. Calibrated with varying levels of observed economic leading indicators, our approach offers a deeper understanding of LVQ’s uncertainties. Our results demonstrate the inadequacy of SPA, unveiling diverse risks and worst-case protection strategies. By encouraging researchers to consider temporal dependence, this study contributes to enhancing the robustness of data-driven approaches in financial and economic analyses, offering a comprehensive framework for addressing SPA concerns.

When and for Whom Does Growth Becomes Jobless?

The results of previous research suggest that the elasticity of employment with respect to output is not constant within each phase of the business cycle and might depend on the maturity of that phase. Nevertheless, empirical evidence is almost non-existent. Using the unemployment gap as the proxy for the maturity of the business cycle phase, this paper seeks to determine heterogeneous elasticity across different business cycle phases. Furthermore, we aim to evaluate specific elasticities for separate demographic groups, considering gender, age, and educational attainment level, to identify the most vulnerable to jobless growth. Our specification is based on the employment version of Okun’s law, and estimates are provided for the whole EU-27 panel covering the period from 2000 to 2022. Our results suggest that elasticity is higher when the unemployment gap is positive and increasing and lower when the gap decreases, regardless of the business cycle phase. Thus, it can be argued that the possibility of growth increasing employment is very limited when the economy operates at its potential level (full employment) for all demographic groups.

From resource curse to green renaissance: Analyzing the dynamics of natural resource abundance on China's green total factor productivity during business cycles

The current body of research fails to thoroughly examine how the abundance of natural resources affects China's green total factor productivity during different phases of economic cycles. The interconnection between the natural resource abundance and the green total factor productivity in China, the second-biggest economy worldwide, offers valuable insights into the sustainable management of resources amidst fast economic expansion. This research aims to analyze how the abundance of natural resources influences China's total green factor productivity during different phases of business cycles. A fully modified and dynamic ordinary least squares methodology uses cyclical data from 1990Q1 to 2019Q4. The findings indicate that during boom periods, a surge in natural resource abundance, gross domestic product, financial development, foreign direct investment and renewable energy consumption are correlated with heightened levels of green total factor productivity, suggesting that resource-dependent industries experience positive effects due to improved availability and quality of resources. Conversely, the findings infer that a decline in these variables is observed during the recession period, leading to a decrease in green total factor productivity. The results indicate a pro-cyclical relationship between natural resource abundance, gross domestic product, financial development, foreign direct investment and renewable energy consumption during periods of expansion and contraction. Based on the research findings, the study suggests that legislators should emphasize measures that foster investments in clean energy, ethical resource management practices, and financial development during economic booms. In contrast, during economic contractions, attempts should be concentrated on sustaining or boosting investments in green technology, encouraging feasible resource utilization, and enacting policies that foster foreign direct investment.

The central banking system paradox

The conventions of monetary theory assume the central banking system (CBS) as the starting point for achieving the stability and efficiency of the financial system. This paper stresses the stability-efficiency thesis based on the Austrian business cycle theory (ABCT). It argues that the stability-efficiency thesis under CBS poses a paradox for two main reasons. First, central banks' interest rate handling causes business cycles, yielding the intertemporal discoordination of the money and goods markets. Second, a central bank's lender-of-last-resort role is an incentive to call for further interest rate handling, making the chance of smooth business cycles difficult or impossible. This paradox is empirically analyzed and discussed through the True Money Supply (TMS) performance in the United States's business cycle phases between 1975 and 2022. Consistent with the ABCT, the research results unlock the paradox by showing that CBS causes business cycles. Some policy implications are outlined for further research and revision of monetary theory.

Comparing the dynamics of financial and business cycles in the BRICS countries

Subject. The BRICS countries are among the fastest developing and growing economies. However, research on relationship between their financial and business cycles is insufficient. The article intends to address this gap and provide such information. Objectives. The aim is to determine the main characteristics of cycle phases (amplitude and duration) for the BRICS countries and to assess the degree of their synchronization. Methods. The study employs an algorithm for periodization of various phases of financial and business cycles, proposed by D. Harding and A. Pagan in 2003, the analysis of concordance coefficients to determine the degree of synchronization of different cycles, and the logistic regression to quantify the probability of recession in the real sector, if there is a crisis in the financial sector. Results. The findings revealed a high degree of synchronization of financial and business cycles in the BRICS countries, comparable to the EU member States. At the same time, the degree of synchronization changes during crisis events and after political decisions. The degree of synchronization of business cycles turns out to be much higher than financial cycles. Conclusions. The findings should be considered when coordinating the economic policies of the BRICS countries. Using certain fiscal, monetary, or macroprudential tools, countries should take into account that their decisions will also affect other member countries of this organization.

Lending behaviour, political environment and systemic banking crisis in developing economies

The paper examines the impact of bank lending behaviour and political events (i.e., election cycles) on the predicted probability of a systemic banking crisis in developing countries. Using an instrumental variable probit regression for a panel dataset of 137 developing countries over the period 2004–2020, the study found that beyond the estimated thresholds for bank lending, which ranged from 0.2804 to 0.6513, a systemic banking crisis is likely to occur. The study shows that average bank lending increases the likelihood of a systemic banking crisis around election episodes, but it decreases the likelihood of a systemic banking crisis a few years before and after an election. Based on marginal effects, the study found that the negative impact of average bank lending on the likelihood of a systemic banking crisis reverses or diminishes during an election year, but the impact amplifies immediately after the election. The study provides evidence to support that the average bank lending behaviour during the upturn phases of political business cycle reduces the likelihood of a systemic banking crisis, while the average bank lending behaviours during the downturn phases of political business cycle lead to a banking crisis over the electoral cycles.

Developing and Evaluating Sector Rotation Strategy for Indian Equity Markets

This study examines the effectiveness of rotating in and out of a sector based on the stage of a business cycle. Here, we assume that business cycles exist, are part of nature, and neither repeat at a regular intervals nor their intensity or duration are constant. However, we assume that with a perfect set of high-frequency indicators, an investor can perfectly time the business cycle phases. This study divides India's real GDP growth into High, Moderate, Low, and Minuscule growth. GDP Growth is used as an indication of a start/end of a business cycle. In an investor were to create four different portfolios, optimized for each of the business cycle phases, will he/she be able to outperform the SENSEX returns of the buy-and-hold strategy? Here, an attempt to create such four models has been done using Python based on Markowitz Efficient Frontier and Modern Portfolio Theory. Once developed using historical data from September 2005 to March 2020, the study tries to estimate its performance in out-of-sample data, i.e., June 2021-April 2023. Can an investor make higher absolute (not alpha) returns with perfect foresight? We try to evaluate such in this study. Some obvious drawbacks of this model are inapplicability for large investors, mutual funds, etc. However, an investor with small capital and access to data can have an accurate foresight, thus, applying the model in practice can earn higher absolute returns. Even with a tax consideration of moving in and out of sectors, an investor can make a higher absolute return compared to a buy-and-hold strategy.

Cartel formation and the business cycle

ABSTRACT Several theoretical propositions suggest that changes in economic activity can explain the decision to form a cartel. The majority of the propositions claim that cartel formation is more likely in expansionary and less likely in contractionary phases of the business cycle. The propositions are re-examined theoretically and by using data on detected cartels for the European Union. In both cases, the results cannot confirm that more cartels are formed in any of the business cycle phases and that correlated economic growth rates create higher incentives to collude. Furthermore, it cannot be confirmed that more cartels form shortly after respectively the trough or the peak in the business cycle. The conclusion is that cartel formation is unaffected by changes in the business cycle.

Public expenditure multiplier across business cycle phases in an emerging economy: new empirical evidence and dimension

Public expenditure multiplier across business cycle phases in an emerging economy: new empirical evidence and dimension

Uncertainties under monetary tightening and easing shocks and different market states

We examine the impact of monetary policy shocks on monetary policy and stock market uncertainties, testing for asymmetric responses to tightening/easing shocks, business cycle phases, and stock market volatility regimes. To identify monetary shocks, we use a theoretical vector autoregressive model of the US economy that accounts for the interconnectedness between monetary policy and the stock market, augmenting it to accommodate for unconventional monetary policy actions at the zero lower bound. Then, with local projections, we estimate the uncertainty responses of monetary policy and the stock market to such shocks. Our main findings suggest that monetary policy holds promising potential as an effective countercyclical tool to reduce uncertainties, through easing policies in recessions and tightening policies in expansions and/or tranquil stock market volatility regimes.

Enterprise financialization and R&D innovation: A case study of listed companies in China

<abstract> <p>In financial asset allocation, enterprises adjust their investment in R&D innovation according to their motives and the external environment. Based on a review of the literature related to enterprise financialization and R&D innovation, this paper proposes research hypotheses through theoretical analysis first; then, taking China's A-share non-financial listed companies from 2010 to 2019 as research objects, this paper explores the relationship between enterprise financialization and R&D innovation with a quantile panel data model; further, the heterogeneous relationship between the two under different business cycle phases is empirically analyzed. The following conclusions are drawn. First, there is a dynamic relationship between enterprise financialization and R&D innovation, varying with different financing constraints. Second, the dynamic relationship between enterprise financialization and R&D innovation stems from the motivation difference in enterprise asset allocation. Third, there are significant differences in the dynamic relationship at different business cycle phases.</p> </abstract>

Determinants of European Economic Development: From Pandemic to War and Sanctions

Goal – to analyze the influence of the main determinants in the development of the European economy at the beginning of the 3rd decade of the 21st century. Research methodology – the article includes both an analysis of the ideas and views on economic processes of the world’s leading theorists and practitioners of economic science, and confirmation of the conclusions made on the basis of data from international organizations and institutions (Eurostat, ECB, IMF, FRS, etc.). Score/results – the coronavirus lockdowns are highlighted as the first determinant. The second determinant was specially created by the authorities of the EU countries and provided a unique financial stimulus for the economy in order to prevent a chain reaction of demand contraction. The third determinant was expressed in the acceleration of inflation. Its consequence was, to a large extent, the turmoil in the banking sector. Russia-Ukraine war and the sanctions that followed have added to the uncertainty. These four determinants have accelerated the change in business cycle phases and changed some of their typical characteristics. As a result, the authorities are forced to find a balance between curbing inflation and preventing recessions with the help of very fine regulation. Originality/value – the article represents one of the attempts to look at the ongoing processes through the prism of economic theory in order to form the basis for further actions.

Fiscal deficits and the socioeconomic consequences of rebalancing: Insights from a TVP‐VAR with stochastic volatility

AbstractThis article connects two salient economic features: (i) Fiscal shocks have asymmetric effects across business cycle phases (Gechert, Horn, & Paetz, 2019); (ii) the unemployment‐output trade‐off is time varying and may be unstable. The intertwined dynamic behaviour of fiscal deficit shocks and the unemployment‐output trade‐off is studied in this article using a time‐varying parameter (TVP) vector autoregression (VAR) with stochastic volatility techniques applied to the analysis of data from Canada, France, Germany, Japan, Spain, Sweden, United Kingdom and the United States of America. We confirm the trade‐off heterogeneity across country, and its time‐varying nature across time, showing in addition its fluctuation around a long‐run reference value. We document significant short‐run impacts of fiscal shocks on the unemployment‐output trade‐off which, based on the experience of the Global Financial Crisis, becomes larger in periods of economic turmoil. Policy‐wise, the rebalancing of public finances may have unexpected adverse effects on job creation if implemented during slumps, precisely when the labour market sensitivity with respect to the performance of the product market is likely to be more acute. This message is particularly relevant in the aftermath of the Covid‐19 pandemic.

Pandemics and Trade in the 21st Century: Evidence from five Pre-Covid Pandemics

Early evidence suggests that COVID-19 caused a sharp decrease in international trade and a widening of current account imbalances. This paper shows that (qualitatively) similar responses have characterized the effects of previous pandemics. Using data from a sample of 170 countries, we find that a pandemic shock is typically followed by a sizable decrease in output and trade volumes, but an uneven current account response: balances improve in developed (or surplus) economies but deteriorate in developing (or deficit) ones. We also explore potential mechanisms for this asymmetry, and our evidence is pointing to national saving and the business cycle phase as the main reasons behind the divergent current account dynamic responses.Supplementary InformationThe online version contains supplementary material available at 10.1007/s11079-022-09687-1.

Credit risk cyclicality in Serbian banking sector

ABSTRACT In literature there are different research results regarding the impact of borrower’s size on cyclicality of credit risk. The aim of this research is to determine whether the credit risk cyclicality increases with the size of the borrower, using data from Serbian banking sector. The research presented herein is one of the first for developing countries with this subject and where credit risk was approximated by the default rate. Empirical analysis of the time series of loan default rates, as dependent variable, and macroeconomic factors, as explanatory variable, is based on the panel error correction model. Panel units are risk segments. Amount of annual revenue is key criteria for granulation borrowers within key four risk segments (retail, micro, SME and large corporate) that corresponds to its size. In multi-factor model, research results confirm that there is long term relationship between macroeconomic factors and loan default rate in Serbian banking sector in all risk segments. However, in model where GDP is explanatory variable, in the segment of small- and medium-sized enterprises, the adjustment coefficient is not statistically significant. It can be inferred that the credit risk of the SMEs segment is the most resistant to changes in the business cycle phases.

The State-Level Nonlinear Effects of Government Spending Shocks in the US: The Role of Partisan Conflict

Utilising a nonlinear (regime-switching) mixed-frequency panel vector autoregression model, we study the effects of government spending shocks in the United States (US) over the business cycle, while considering the role of partisan conflict. In particular, we investigate whether partisan conflict is relevant to the differences in fiscal spending multipliers in expansionary and recessionary business cycle phases upon the impact of annual government spending shocks, using quarterly state-level data covering 1950:Q1 to 2016:Q4. We find new evidence that fiscal multipliers can vary with economic and political conditions. The cumulated effects of government spending shocks are strong and persistent in recessions when the level of partisan conflict is low.