Source Of Economic Fluctuations Research Articles

Uncertainty Measures and Business Cycles: Evidence From the US

Most of the macro-literature on uncertainty has focused on macro-uncertainty caused by real activity as a source of economic fluctuations. Economic uncertainty reduces total demand in the economy via a conventional channel that is associated with real option theory. Given the findings of the existing literature, financial uncertainty other than macroeconomic uncertainty matters more for business cycle fluctuations. This study seeks to answer the following questions: Is uncertainty the primary cause of the business cycle’s fluctuations? Alternatively, does it matter what kind of uncertainty exists? The research utilized the generalized linear model (GLM) and the Bayesian generalized linear model (BGLM) to analyze a dataset covering the time from July 1960 to April 2015 in the United States. Elevated levels of macroeconomic uncertainty, akin to real uncertainty, and economic policy uncertainty, as measured by news sources, demonstrate a counter-cyclical pattern in relation to business cycles. Low levels of uncertainty have a positive impact on business cycles, leading to an increase in industrial production. Conversely, high levels of uncertainty have a negative effect on business cycles, causing a decline in industrial output. We are of the opinion that high levels of macroeconomic uncertainty have a ripple effect on the entire economy, which may stifle investments, reduce consumption, and create unemployment, which is likely to influence labor participation. JEL Classification: D81, E23, E32, E44, G14.

Components of Uncertainty

Uncertainty is acknowledged to be a source of economic fluctuations. But, does the type of uncertainty matter for the economy's response to an uncertainty shock? This paper offers a novel identification strategy to disentangle different types of uncertainty. It uses machine learning techniques to classify different types of news instead of specifying a set of keywords. It is found that, depending on its source, the effects of uncertainty on macroeconomic variable may differ. I find that both good (expansionary effect) and bad (contractionary effect) types of uncertainty exist.

COMPONENTS OF UNCERTAINTY

AbstractUncertainty is acknowledged to be a source of economic fluctuations. But, does the type of uncertainty matter for the economy's response to an uncertainty shock? This article offers a novel identification strategy to disentangle different types of uncertainty. It uses machine learning techniques to classify different types of news instead of specifying a set of keywords. The article finds that, depending on its source, the effects of uncertainty on a macroeconomic variable may differ. I find that both good (expansionary effect) and bad (contractionary effect) types of uncertainty exist.

Does uncertainty affect real activity? Evidence from state-level data

We use variation in the effect of US-wide or global uncertainty on state-level uncertainty to identify the impact of this shock on real activity. We find that increases in uncertainty do have an adverse impact on real income, employment and unemployment. Thus, uncertainty shocks can be a source of economic fluctuations.

An Evaluation of Friedman's Monetary Instability Hypothesis

In this article, I examine what I call Milton Friedman's Monetary Instability Hypothesis. Drawing on Friedman's work, I argue that there are two main components to this view. The first component is the idea that deviations between the public's demand for money and the supply of money are an important source of economic fluctuations. The second component of this view is that these deviations are primarily caused by fluctuations in the supply of money rather than the demand for money. Each of these components can be tested independently. To do so, I estimate an otherwise standard New Keynesian model, amended to include a money demand function consistent with Friedman's work and a money growth rule, for a period from 1875 to 1963. This structural model allows me to separately identify shocks to the money supply and shocks to money demand. I then use variance decompositions to assess the relative importance of shocks to the supply and demand for money. I find that shocks to the monetary base can account for up to 28% of the fluctuations in output whereas money demand shocks can account for less than 1% of such fluctuations. This provides support for Friedman's view.

An Evaluation of Friedman's Monetary Instability Hypothesis

In this paper, I examine what I call Milton Friedman's Monetary Instability Hypothesis. Drawing on Friedman's work, I argue that there are two main components to this view. The first component is the idea that deviations between the public's demand for money and the supply of money are an important source of economic fluctuations. The second component of this view is that these deviations are primarily caused by fluctuations in the supply of money rather than the demand for money. Each of these components can be tested independently. To do so, I estimate an otherwise standard New Keynesian model, amended to include a money demand function consistent with Friedman's work and a money growth rule, for a period from 1875-1963. This structural model allows me to separately identify shocks to the money supply and shocks to money demand. I then use variance decompositions to assess the relative importance of shocks to the supply and demand for money. I find that shocks to the monetary base can account for up to 28% of the fluctuations in output whereas money demand shocks can account for less than 1% of such fluctuations. This provides support for Friedman's view.

Characterizing Political Cycles

Political business cycle research has continued to be limited to finding empirical evidence on whether politicians are a source of economic fluctuation. Unlike conventional business cycle research, studies that characterize the nature of political cycles are scarce; which is a problem arising from using qualitative dummy variables to capture political business cycle in literature. Therefore, this study bridges this gap by characterising the properties of political cycles in Nigeria. First, a Dynamic Factor Model is used to construct political cycle components. Once derived, the characteristics of constructed political shocks were measured. Our results were rather striking for a country such as Nigeria. The cyclical characteristics revealed that: political cycle is not subject to frequent fluctuation; and it contributes a negligible size as a source of economic fluctuations in Nigeria. A political economy implication of these findings is that politically-induced fluctuation is only a trivial source of shocks to Nigeria’s economy

News and Aggregate Demand Shocks

In this review, I look at the recent literature on news as a source of economic fluctuations. The main question in this literature is: how does the aggregate economy respond to a shock that raises consumers' and firms' expectations about future productivity growth? I discuss how different papers have addressed this question, emphasizing the mechanisms at work under different specifications of preferences and technology, under different assumptions about nominal and real rigidities, and under different assumptions about the agents' information structure. I also briefly discuss some challenges faced by the empirical literature on the topic.

Sources of economic fluctuations in oil-exporting economies: implications for choice of exchange rate regimes

If a country is dependent on one particular export commodity, what exchange rate policy should it follow? Surprisingly, there is no standard textbook prescription for such a country. In theory, rigidly pegging exchange rates to those of the developed economies allow emerging markets to fix the price of tradable goods and import monetary policy credibility leading to greater macroeconomic stability. The corollary being that countries lose their ability to react independently to domestic economic concerns. Nowhere are these macroeconomic policy dilemmas currently more acute than for emerging market oil-exporting economies, with their pegged exchange rates making it difficult to adjust to swings in the high price of crude oil. This paper investigates whether through rigidly fixing the exchange rate it is now the case that the disadvantages associated with importing a monetary policy ill-suited to the need of oil-exporting countries, now outweigh the gains from importing US monetary policy. The results in this paper show that pegged regimes are poor at insulating emerging market commodity-dependent economies from real shocks, in particular terms-of-trade disturbances. Allowing for caveats, the results show that greater macroeconomic stability could be fostered in emerging market oil-exporting economies by allowing for greater flexibility in their exchange rate regimes. Copyright © 2010 John Wiley & Sons, Ltd.

Do institutions matter for economic fluctuations? Weak property rights in a business cycle model for Mexico

In this paper we introduce weak property rights in the standard real business cycle (RBC) model in order to examine the role of institutions as a source of economic fluctuations in emerging markets. In particular, in Mexico, the movements in productivity in the data are associated with changes in institutions, so that we can explain productivity shocks to a large extent as shocks to the quality of institutions. We find that the model with shocks to the degree of protection of property rights can match the second moments in the data for Mexico very well. Moreover, the fit is better than that of the standard neoclassical model with full protection of property rights regarding the auto-correlations and cross-correlations in the data. Viewing productivity shocks as shocks to institutions is also consistent with the stylized fact of falling productivity and non-decreasing labor hours in Mexico over 1980–1994, which is a feature that the neoclassical model cannot match.

LIFE CYCLE OF PRODUCTS AND CYCLES

The aim of this paper is to examine whether the development of waste recycling activities can be a source of economic fluctuations. We assume that the recycling sector has four fundamental characteristics. (i) The production factors are restricted by the production of the last period. (ii) These production factors are waste for which the price determination is noncompetitive. (iii) The sector produces a recycled good, which is a perfect substitute for the primary good. (iv) It reduces the waste stream. We consider the simplest economy, with an infinitely lived agent and a life-cycle hypothesis for the goods. We show that the equilibrium is unique and is always determinate. In spite of the lack of indeterminacy, however, our economy can display cyclical behavior, depending on some usual conditions on parameters. Namely, the steady state may undergo a flip bifurcation or a Hopf bifurcation.

Surprising Comparative Properties of Monetary Models: Results from a New Model Database

In this paper we investigate the comparative properties of empirically-estimated monetary models of the U.S. economy. We make use of a new data base of models designed for such investigations. We focus on three representative models: the Christiano, Eichenbaum, Evans (2005) model, the Smets and Wouters (2007) model, and the Taylor (1993a) model. Although the three models differ in terms of structure, estimation method, sample period, and data vintage, we find surprisingly similar economic impacts of unanticipated changes in the federal funds rate. However, the optimal monetary policy responses to other sources of economic fluctuations are widely different in the different models. We show that simple optimal policy rules that respond to the growth rate of output and smooth the interest rate are not robust. In contrast, policy rules with no interest rate smoothing and no response to the growth rate, as distinct from the level, of output are more robust. Robustness can be improved further by optimizing rules with respect to the average loss across the three models.

International Dependency and Economic Fluctuations in East Asian NIEs

This paper investigates the sources of economic fluctuations in the four Asian newly industrialized economies (NIEs), namely Hong Kong, Republic of Korea, Singapore and Taiwan. As small open economies, their macro-economic development is highly dependent on technology as well as markets of large countries. Using the common trends model, we examine the impacts of external supply shock, internal supply shock and trade shock on the key national macro-economic variables of these four economies, i.e. output, consumption, investment, export and import. Our empirical evidence suggests that supply-side disturbances, both the country-specific supply shocks and international supply shocks explain the bulk of fluctuations in output.

DSGE Models in a Data-Rich Environment

Standard practice for the estimation of dynamic stochastic general equilibrium (DSGE) models maintains the assumption that economic variables are properly measured by a single indicator, and that all relevant information for the estimation is summarized by a small number of data series. However, recent empirical research on factor models has shown that information contained in large data sets is relevant for the evolution of important macroeconomic series. This suggests that conventional model estimates and inference based on estimated DSGE models might be distorted. In this paper, we propose an empirical framework for the estimation of DSGE models that exploits the relevant information from a data-rich environment. This framework provides an interpretation of all information contained in a large data set, and in particular of the latent factors, through the lenses of a DSGE model. The estimation involves Markov-Chain Monte-Carlo (MCMC) methods. We apply this estimation approach to a state-of-the-art DSGE monetary model. We find evidence of imperfect measurement of the model's theoretical concepts, in particular for inflation. We show that exploiting more information is important for accurate estimation of the model's concepts and shocks, and that it implies different conclusions about key structural parameters and the sources of economic fluctuations.

A simple, structural, and empirical model of the antipodean transmission mechanism*

This paper studies the transmission of business cycles and the sources of economic fluctuations in Australia and New Zealand by estimating a Bayesian DSGE model. The theoretical model is that of two open economies that are tightly integrated by trade in goods and assets. They can be thought of as economically large relative to each other, but small with respect to the rest of the world. The two economies are hit by a variety of country‐specific and world‐wide shocks. The main findings are that the pre‐eminent driving forces of antipodean business cycles are worldwide technology shocks and foreign, i.e. rest‐of‐the‐world, expenditure shocks. Domestic technology shocks as well as monetary policy shocks appear to play only a minor role. Transmission of policy shocks is asymmetric, and neither central bank is found to respond to exchange rate movements. The model can explain 15% of the observed exchange rate volatility.

Non-fundamental expectations and economic fluctuations: Evidence from professional forecasts

It is theoretically possible that non-fundamental idiosyncratic shocks to agents’ rational expectations are a source of economic fluctuations. Studies using data on consumer and investor sentiment suggest that this is indeed an important source of fluctuations. We present the results of a study that uses forecasts from professional forecasters to extract non-fundamental shocks to expectations. In contrast to previous studies, we show that non-fundamental expectations are not a significant source of output fluctuations, although such shocks contributed to inflation.

Trends in Hours, Balanced Growth and the Role of Technology in the Business Cycle

The present paper revisits a property embedded in most dynamic macroeconomic models: the stationarity of hours worked. First, I argue that, contrary to what is often believed, there are many reasons why hours could be nonstationary in those models, while preserving the property of balanced growth. Second, I show that the postwar evidence for most industrialized economies is clearly at odds with the assumption of stationary hours per capita. Third, I examine the implications of that evidence for the role of technology as a source of economic fluctuations in the G7 countries.

Trends in Hours, Balanced Growth, and the Role of Technology in the Business Cycle

The present paper revisits a property embedded in most dynamic macroeconomic models: the stationarity of hours worked. First, I argue that, contrary to what is often believed, there are many reasons why hours could be nonstationary in those models, while preserving the property of balanced growth. Second, I show that the postwar evidence for most industrialized economies is clearly at odds with the assumption of stationary hours per capita. Third, I examine the implications of that evidence for the role of technology as a source of economic fluctuations in the G7 countries.

Technology Shocks and Aggregate Fluctuations: How Well Does the RBC Model Fit Postwar U.S. Data?

Our answer: Not so well. We reached that conclusion after reviewing recent research on the role of technology as a source of economic fluctuations. The bulk of the evidence suggests a limited role for aggregate technology shocks, pointing instead to demand factors as the main force behind the strong positive comovement between output and labor input measures.

Technology Shocks and Aggregate Fluctuations: How Well Does the Real Business Cycle Model Fit Postwar U.S. Data?

Our answer: not so well. We reach that conclusion after reviewing recent research on the role of technology as a source of economic fluctuations. The bulk of the evidence suggests a limited role for aggregate technology shocks, pointing instead to demand factors as the main force behind the strong positive comovement between output and labor input measures.