Business Cycle Research Articles

Law and Macro Finance

Abstract This article makes the case for developing law and macro-finance as an integrated research field that explores the role of credit and its regulation within the economic cycle. It highlights the importance of macro-financial conditions, such as leverage and liquidity, over traditional concerns like agency costs and efficiency when assessing the economic impact of the law. The article argues that the future of law and macro-finance research should focus on demonstrating (1) how the law operates under different macro-financial conditions, (2) how the law can shape these conditions, and (3) how these conditions influence legal frameworks. This research is partly inspired by, and could also be valuable for, organizations like the World Bank and IMF, which increasingly acknowledge the role of debt in financial crises and are beginning to promote policies that help countries better align the size of their credit markets with their economic needs.

New challenges in European innovation partnerships: SOEs, POEs and foreign MNEs during crises

AbstractCooperation for innovation, not only enhances the innovative and economic performance of companies but also fosters growth and strengthens the resilience of firms in the realm of innovation activities. In this study, we delve into the cooperative activities of innovative Spanish companies with their European counterparts. We employ six logit models using panel data to scrutinize the impact of ownership on innovation cooperation and the determinants of collaboration across different phases of the business cycle, spanning from 2004 to 2016, which we divide into three sub-periods: the pre-crisis (2004–2007), the crisis (2008–2013), and the recovery (2014–2016). Throughout the businesses cycle, state-owned enterprises are the most prone to engage in cooperative innovation with European partners, while unaffiliated domestic firms are the least prone. Foreign subsidiaries clearly outperform unaffiliated domestic firms and slightly outperform domestic business groups in prosperous times, but do not outperform state-owned enterprises even during crises. The drivers of cooperation for innovation with European partners evolve over time, becoming particularly challenging during crises. The factors influencing cooperation with European universities exhibit distinct characteristics. The results contain policy and management implications.

Challenges of Applying Circular Economy in Agricultural Sustainable Development: A Case Study of Kurdistan Province, Iran

Current production and distribution models in agriculture primarily operate based on the 'linear economy' approach. This means that after the exploitation of natural resources and the production of the final product, a significant portion of these resources and products, now contaminated or turned into waste, exit the economic cycle. The circular economy approach in agriculture seeks to reuse waste products and depleted inputs, thereby reducing the intensity of resource exploitation and taking a step towards sustainable agriculture. However, applying circular economy concepts in agriculture across different regions, especially in developing countries like Iran, can encounter various obstacles and challenges. The present study aims to identify and analyze these obstacles and challenges in the agriculture sector of Kurdistan Province, one of Iran’s key agricultural regions. For this purpose, after reviewing the literature and gathering expert opinions from the province's agrarian elites, 16 challenging factors were identified as potential barriers to expanding the circular economy in Kurdistan Province. These were examined and analyzed using the Interpretive Structural Modeling (ISM) approach. The required data were collected via a questionnaire in the spring of 2024. The research findings indicate that among the 16 factors analyzed, the key variables are the second, first, and third factors—namely, the illiteracy and low literacy rates among farmers, traditional and subsistence farming, and the small size and fragmentation of agricultural lands in Kurdistan Province. According to the experts and specialists interviewed, addressing these variables can significantly influence others, reducing the barriers and challenges facing the circular agricultural economy and the sustainable development of agriculture in Kurdistan Province.

Hiring opportunities for new firms and the business cycle

AbstractWhether firms founded during or outside economic crises have greater growth potential is an important question for both prospective entrepreneurs and policy makers. Existing research offers conflicting answers, and mostly either focuses on aggregate cohort-level effects or selectively excludes small new firms from the analyses. Using extensive linked employer-employee data on young German firms around and during the Global Financial Crisis, a period of sharply reduced access to external capital and recession, we show that young firms respond to cyclical conditions in highly heterogeneous ways. Our firm-level results reveal that the average new firm found it easier to hire its first employees when it was founded during the crisis. These firms achieved countercyclical growth by hiring career entrants. More specifically, hiring in very young (<1.5 years) and small to medium-sized (below the 90th percentile) young firms was countercyclical, while this was not the case for older and larger young firms. Thus, the firm-specific effects for young entrepreneurial firms may be very different from those reported in previous research. Our results suggest that market entry during a crisis may facilitate hiring and that policies that promote entrepreneurship may usefully complement policies that encourage labor hoarding by incumbents during recessions.

Community-based economic romance and integration: assessing the feasibility of a currency union in South Asia

Purpose This purpose of this study aims to critically evaluate the feasibility of establishing a single currency area within the South Asian Association for Regional Cooperation (SAARC) by examining the economic integration of its member states. The analysis focuses on the extent to which the region meets the criteria of the optimum currency area (OCA) theory, particularly in terms of business cycle synchronization, labor mobility and capital flows. Design/methodology/approach Using a vector autoregression (VAR) model within the aggregate demand-aggregate supply framework, this research investigates the symmetry of supply and demand shocks across SAARC economies. The study analyzes the synchronization of business cycles and the mobility of labor and capital to determine the readiness of SAARC for a unified currency. Findings The results indicate significant asymmetries in business cycles among SAARC countries, with substantial disparities in economic responses to shocks. These findings suggest that the region lacks the necessary economic synchronization required for a successful single currency area. Limited labor and capital mobility further complicate the potential for economic integration within SAARC. Research limitations/implications The study is constrained by data inconsistencies and the limited range of economic indicators available for SAARC countries. Future research should expand the analysis to include a broader set of socioeconomic factors and more comprehensive data sets to better assess the region’s potential for monetary integration. Practical implications The study highlights the challenges of forming a currency union in South Asia due to economic disparities and limited mobility. However, gradual steps toward deeper regional integration, improved financial infrastructure and enhanced cross-border collaboration could foster long-term economic stability, growth and social cohesion in the SAARC region. Social implications The research highlights the potential social benefits of enhanced economic integration, such as increased community resilience and social cohesion, while also warning of the risks associated with premature monetary union in a region with significant economic disparities. Originality/value This study provides a detailed analysis linking the theoretical framework of the OCA to the practical realities of economic integration in South Asia. By focusing on the specific economic conditions of SAARC member states, the research offers valuable insights for policymakers considering regional monetary integration.

The Relationship Between the Development of the Art Industry and the Turnover of Economic Cycles

Abstract: In recent years, the area has grown significantly, creating a trend in art appreciation. This boom has led to a surge in the popularity of museums such as the National Gallery. This project aims to find out more about the economic contribution of art exhibitions. Using advanced time series analysis models including the intervention analysis model and vector autoregressive model, we obtained the following conclusions. First, the positive impact of low levels of economic development and high levels of government expenditure on the arts industry is obvious. Second, the growth of the arts industry has a small impact on most economic indicators. Third, the final impact of GDP on the arts industry is still uncertain due to the complex pattern of the model, with the possibility of a positive correlation with ln (art prices) being observed in the early stages of small GDP growth, while a quadratic pattern may be observed when the GDP index grows above a certain level and art prices fall Conclusion. Further research is needed to investigate the complex relationship between inflation and art prices. Our academic contribution mainly focuses on the multiple-way causal relationships between the economy, art exhibition, tourism, and education, which reveals the underlying mechanism of how art exhibitions promote the economy.

Firm Inattention and the Efficacy of Monetary Policy: A Text-Based Approach

Abstract This paper provides empirical evidence of the importance of firm attention to macroeconomic dynamics.We construct a text-based measure of attention to macroeconomic news and document that attention is polarized across firms and countercyclical. Differences in attention lead to asymmetric responses to monetary policy: expansionary monetary shocks raise market values of attentive firms more than those of inattentive firms, and contractionary shocks lower values of attentive firms by less. Attention also mitigates the effects of macroeconomic uncertainty on firm performance. In a quantitative rational inattention model that is calibrated with this new text-based measure, inattention drives monetary non-neutrality. As average attention varies over the business cycle, so does the efficacy of monetary policy.

FIRM SIZE AND BUSINESS CYCLES WITH CREDIT SHOCKS

AbstractI study the macroeconomic implications of firm heterogeneity in the presence of financial frictions. I build a business cycle model in which firm size is jointly determined by idiosyncratic productivity and collateral constraints. I estimate skewed idiosyncratic shocks and align the model with the evidence on firm size, leverage, and investment moments. The extent of resource misallocation is driven by a small number of highly productive but financially constrained firms. A credit shock severely affects such firms, further constraining their ability to borrow. This generates a large and persistent economic downturn that is comparable to the Great Recession.

A new look at the finance–environment nexus: How yield spread affects environmental quality in the United States

AbstractEnhancing environmental quality is currently a key focus for policymakers. Furthermore, researchers are also prioritizing the investigation of novel variables that can influence environmental quality. The yield spread is commonly used as a leading indicator for business cycles in the macro‐finance literature, providing information about future expectations regarding business cycles. The yield spread also presents information about the borrowing costs of firms. None of the existing studies in the environmental economics literature has tested the impact of the yield spread on environmental quality, implying the level of the yield spread has not been considered a variable that can influence environmental quality. This study aims to fill this gap by providing evidence on the effect of yield spread (between 2‐ and 10‐year government bonds) on environmental quality in the United States from June 1976 to September 2023. The results indicate that an increase in the yield spread leads to a rise in environmental destruction. These results suggest two considerable consequences. First, optimistic expectations today lead to the overuse of resources and environmental destruction. Second, firms' higher borrowing costs may be forcing them to use less environmentally friendly production methods to offset more expensive financing costs and increase their profits. This study asserts that companies should enhance their environmental sensitivity, and policymakers should adopt a more proactive stance, based on the results of this study and other research that demonstrates the detrimental impacts of environmental regulation violations and poor environmental performances on companies' stock prices and financial performances.

Heterogeneous biased expectations of young and old individuals: macroeconomic effects and policy implications

Abstract This paper examines the effects of heterogeneous biased expectations between the young and old on business cycles and explores its policy implications. Empirical findings reveal that individuals, particularly the young, can have more optimistic or pessimistic views about the future state of the economy compared to the data-generating measure. This study relates these results to the learning-from-experience literature, which suggests that individuals, particularly the young, place greater weight on recent observations when forming their expectations. Incorporating household weighting schemes into a life-cycle learning model, I show that household sensitivity to recent observations amplifies the effects of economic shocks. However, the amplification effects become less extensive as the population ages due to the lower sensitivity of the old. My simulation results indicate that a 10 percentage point increase in the old population ratio leads to a 16 percent decrease in output volatility. Regarding policy implications, this paper suggests that the government spending multiplier declines by approximately 10 percent when the old population ratio rises by 10 percentage points due to weak amplification effects. Moreover, the weakened output effects deteriorate the welfare of the population, particularly that of the young.

Curbing household food waste and associated climate change impacts in an ageing society.

We explored the intricate quantitative structure of household food waste and their corresponding life cycle greenhouse gas emissions from raw materials to retail utilizing a combination of household- and food-related economic statistics and life cycle assessment in Japan. Given Japan's status as a nation heavily impacted by an aging population, this study estimates these indicators for the six age brackets of Japanese households, showing that per capita food waste increases as the age of the household head increases (from 16.6 for the 20's and younger group to 46.0 kg/year for 70's and older in 2015) primarily attributed to the propensity of older households purchase of more fruits and vegetables. Further, the largest life cycle greenhouse gases related to food waste was 90.1 kg-CO2eq/year for those in their 60's while the smallest was 39.2 kg-CO2eq/year for 20's and younger. Furthermore, food waste and associated emissions are expected to decline due to future demographic changes imparted by an aging, shrinking population after 2020 until 2040. Specific measures focused on demographic shifts are crucial for Japan and other countries with similar dietary patterns and demographics to achieve related sustainable development goals through suppressing food waste and associated emissions under new dietary regimes.

New insights on the role of the farm household-farm operation interface in family farm persistence and a call for future research

Rural social scientists have long sought to understand what the structure of agriculture will look like in the future, who is going to do the work, and under what conditions with a focus on family owned and operated farms. Central to the theorization of farm families' ability to continue farming in the midst of on-going changes are the deep inter-connections between the farm household and the farm operation and farm families’ ability to adjust how resources are used within the farm household and operation spheres. Yet in this paper we argue that the interface between the household and operation has largely been treated as a black box and when it has been considered, it has largely been from the vantage point of the farm operation at the expense of the farm household. We substantiate our argument by drawing on insights from our individual research and collective discussions during a three-day workshop around three themes (i.e. gender, life course and farm business cycle, formal and informal support systems). As an invitation for others to join us in opening a new line of research, we propose a research agenda and discuss considerations around research designs, data, funding, and collaborations to tackle this research agenda.

Asymptotic behavior of solutions of nonlinear discrete systems in critical cases

AbstractThe paper is dedicated to the analysis of the asymptotic behavior of essentially nonlinear discrete systems whose linearization possesses eigenvalues on the unit circle. For these systems, the paper establishes sufficient conditions for the asymptotic stability regardless of terms higher than the third order. Moreover, it derives an asymptotic stability criterium for a reduced critical subsystem. The proof incorporates a constructive approach for deriving Lyapunov functions using the center manifold reduction and normal form method. The key result of the paper asserts that, given the obtained stability conditions, the solutions of the system converge to the origin with a polynomial decay rate. The paper also introduces a method for evaluating the coefficients of the decay rate estimate. To illustrate these findings, we apply the obtained result to analyzing nonlinear business cycle and predator-pray models.

Nonlinearity in exchange rate pass-through across BRICS: Role of business cycle and inflation

Nonlinearity in exchange rate pass-through across BRICS: Role of business cycle and inflation

Economic policy uncertainty and narrative R&D disclosures

This study examines the impact of economic policy uncertainty on narrative R&D disclosure. Analyzing 10-K reports from 1997 to 2020, we find that the quantity of R&D disclosure increases with economic policy uncertainty. We also document that firms provide more forward-looking R&D disclosure during uncertain periods. Finally, we find that such impact is more pronounced for the firms with high return volatility and firms in the early-stage of business cycle. We contribute to the literature by showing how managers adjust R&D disclosures in response to economic policy uncertainty.

Modelling the growth and cyclical effects of international remittances in Fiji

ABSTRACT We model the trend/permanent and cyclical associations between international remittances and GDP using annual data from Fiji from 1979 to 2020. An extended co-feature methodology which incorporates asymmetric effects in the cyclical models is used. The findings indicate a significant and positive association between the permanent components of remittances and GDP. The cyclical associations suggest that an increase in remittances is negatively associated with negative GDP shocks in recessions providing some support for its function as an insurance mechanism. Positive shocks to remittances are not associated with positive GDP shocks suggesting that remittances may not contribute to an overheating economy. The findings stress the importance of cyclicality in the association between remittances and GDP. Policymakers benefit with information on how remittances influence economic activity in different phases of the business cycle.

In pursuit of power: Land tenancy contracts and local political business cycles in Indonesia

This study examines whether strategic delegation of land tenancy contracts is linked to local-level political business cycles in the context of a village institution – bengkok land – prevalent since the Dutch colonial rule in Indonesia. Bengkok land refers to communal village land that incumbent village heads receive usufruct rights over until their term in the office ends. We test whether incumbent village heads utilize time-bound access to bengkok land for political consolidation. Based on a novel cross-sectional household survey fielded in 2018 across 130 Javanese villages, we find robust evidence of a positive correlation between the percentage of total tenancy contracts as sharecropping and proximity (before or after) to the village election. As vulnerability of the sharecroppers makes them a pro-poor target for the incumbent village heads, these results implicate political capture.

Economic value added and working capital efficiency linkages: an Indian context

Purpose This paper aims to explore the relationship between the economic value added (EVA) and the working capital efficiency (WCE) of the listed firms in India. Design/methodology/approach This paper uses annual data of 401 listed companies for the period 2012–2019. Furthermore, the dynamic panel data regression model was used to investigate the relationship between the variables of interest. Findings The results reveal that the net trade cycle (NTC) is significantly and negatively associated with listed firms’ economic value in India, indicating that a shorter NTC generates higher EVA for Indian firms. The authors further explore the association between individual components of the NTC with EVA. The authors also found that an inverse, and significant relationship exists between EVA and the individual components of the NTC. The findings also reported a meaningful relationship between EVA and control variables except for leverage and age. For listed firms, the results suggest that sales growth and firm size are crucial factors driving firms’ EVA. Practical implications Higher WCE enhances shareholder value creation, forming positive stakeholders’ expectations toward the company. Originality/value Over the years, many studies have been conducted to determine the relationship between WCE and traditional measures of firms’ profitability. However, hardly any study finds out the impact of WCE on the value-based measures of firms’ performance. This study fills the gap in the existing literature by analyzing the impact of WCE on firms’ EVA.

거시경제학의 근본적인 문제점: 항등식을 인과성으로 사용

GDP, which only measures the value of the final product, ignores the various production processes that take place in the real world before the final product is produced. In this sense, GDP is not a reflection of the real world, but rather an artificially constructed measure of a ‘fictitious economy’. A bigger problem with GDP is that the identity equation, by which GDP is expressed as the sum of consumer spending, business investment spending, government spending, and net exports, is used in a causal way. Using this identity equation, governments often implement policies that increase spending to stimulate the economy and grow the economy. However, the principle of human behavior that one must first produce in order to consume implies that production is the cause and consumption is the effect. The idea, which implies that consumption is the cause, is thus incorrect because it goes against the principle of human behavior. This idea is based on Keynes's theory. Keynes's theory, as presented in his General Theory, is a misinterpretation of Say's Law of the Market, which states that “when one product is produced, it creates a demand for another product,” as “supply creates its own demand.” Macroeconomics, which was started based on the wrong Keynes' theory, is also a theory that is far from the real world and does not explain the economic problems that are occurring in the real world, such as the financial crisis. Therefore, in order for macroeconomics to properly explain the real world, it is necessary to establish a new macroeconomics. The new macroeconomics should be based on the principles of human behavior and should include the actual production process and the activities of entrepreneurs, who play an important role in the production process. The Austrian Business Cycle Theory, which covers these aspects, can serve as the cornerstone of a new macroeconomic theory.

Performance evaluation of bio-oil and high rubber content modified asphalt: More effective waste utilization

In this study, the bio-oil was used to reduce the viscosity and preparation temperature of high content of rubber-modified asphalt. The high rubber content modified bio-asphalt (RMBA) was prepared, the rubber and bio-oil contents were 20 %-30 % and 5 %-15 % (mass ratio of neat asphalt), respectively. The viscosity, temperature sweep (TS), frequency sweep (FS), multi-stress creep recovery (MSCR), and bending beam rheometer (BBR) tests were performed to assess the properties of RMBA. The Fourier Transform infrared spectroscopy (FTIR), Fluorescence microscopy (FM), and Scanning electron microscope (SEM) tests were conducted to explore the microscopic morphology of RMBA. Besides, the economic analysis and life cycle assessment (LCA) were assessed. Bio-oil contributed to the viscosity-reduction of the RMBA. When the rubber content was 30 %, the viscosity decreased by 48.16 % with a bio-oil content of 15 %. The temperature and frequency sensitivity of RMBA were lower than neat asphalt. Rubber improved the creep recovery and anti-rutting deformation behavior for bio-asphalt. The absorption peaks appeared at 1010 and 1038 cm−1, which represented the SO function group. The rubber did not absorb enough bio-oil for solubilization. This resulted in the functional group of SO appeared in 30 %+B-10 % and R-30 %+B-15 %. FM and SEM test results indicated that the rubber in RMBA exists in different states: undissolved rubber and dissolved rubber. The high content rubber could be partially dissolved in bio-asphalt and retained its elastic properties. The dissolved rubber particles exhibited a large crosslinked network structure. The raw material cost of RMBA decreased significantly with the rise of rubber and bio-oil contents. The reasonable application of waste rubber is beneficial to the alleviation of black pollution. The efficient application of rubber and bio-oil could contribute to the development of waste utilization and green transportation.