Business Cycle Volatility Research Articles

Public wages, public employment, and business cycle volatility: Evidence from U.S. metro areas

We revisit the question about whether a larger public sector stabilizes or destabilizes the economy. Based on results from two causal identification approaches, we show that a higher rate of public-sector employment reduces volatility in, i.e. stabilizes, private-sector employment growth, with at most a slight crowding-out of private employment. Public wages, meanwhile, increase private wages but appear not to be destabilizing. The stabilizing effect of public employment with limited crowding out is at odds with standard search and matching models that contain a public sector, which predict 1:1 crowding out and strong destabilization. To improve the performance of such models, we follow Gomes (2015) and add a product market that can replicate what Gomes calls the Business Cycle Wealth Effect. We also point out that the government procures output directly from the private sector. When the model has these two features, then it can generate stabilizing effects of public employment on private employment, with reduced crowding out.

Racial disparities in labor outcomes: The effects of hiring discrimination over the business cycle

The resume audit literature provides strong evidence of discriminatory practices in hiring, raising critical concerns regarding equitable labor market outcomes. While the impacts of these practices on disparities in labor market levels are better understood, their cyclical effects are less known. In this paper, we research how hiring discrimination affects the volatility of labor market outcomes for disadvantaged groups by integrating empirical findings from audit studies into a search-and-matching model with a modified urn-ball matching function. Intuitively, in recessions, there are more applicants per job opening, which hurts discriminated groups. Applying this model to the U.S. economy, we find that it accounts for approximately 70% of the excess business cycle volatility in the unemployment rates of African Americans, as recorded in CPS data. Our research highlights the broader economic implications of discrimination, stressing the necessity for policy interventions, and offers a novel framework for future studies on labor market inequalities.

International input–output linkages and changing business cycle volatility

We quantify the effects of changes in international input–output linkages on the nature of business cycles. We build a multi-country international business cycle model with manufacturing and non-manufacturing sectors that matches the input–output structure within and across countries. We find that, in our 23-country sample, changes in the international input–output linkages between 1970 and 2007 have led to a drop in output volatility in all countries, explaining up to a half of the drop in output volatility in a median country observed in the data. In the model, stronger international linkages tend to stabilize output in response to domestic shocks, and destabilize for foreign shocks. Since foreign shocks still play a modest role in driving domestic business cycles, the stabilization effects dominate. Nevertheless, changing international linkages have generated larger shock transmission across countries, increasing the risk of a global recession.

Sources of Business Cycle Volatility in the Indian Economy

This study investigated the sources of economic fluctuation in the Indian economy. To assess this objective, time-based and frequency-based filters are applied to extract the business cycle from the Gross Domestic Product. Further, a causal link between the business cycle and its different sources was explored using Markov’s regime-switching regression. The results indicated that total factor productivity, oil supply, and monetary policy increased business cycle volatility. Furthermore, although the fiscal policy remained unaffected, trade increased economic fluctuations during the pro-market regime. The findings suggested that the views of the real business cycle and monetarist schools of thought hold true for economic fluctuation in India, as opposed to the Keynesian view.

Government size, inflation targeting and business cycle volatility

In this paper I analyze how government size used as a proxy for fiscal stabilization policy and inflation targeting influence the amplitude of the business cycle and private consumption volatility in a sample of developing countries, for the period between 1990 and 2018. Taking into account the potential endogeneity of these variables, and controlling for the exogenous variation in trade openness, the analysis provides strong evidence that government size significantly reduces business cycle volatility while it exerts no significant impact on private consumption volatility. On the other hand, adopting inflation targeting significantly increases the amplitude of the volatility of real output growth, while significantly decreasing private consumption volatility. The implemented form of the inflation targeting regime does not introduce any significant changes in the obtained results. The findings seem to provide evidence that there is a potential for an improved coordination between fiscal and monetary policy actions in developing countries that have adopted inflation targeting.

International Input-Output Linkages and Changing Business Cycle Volatility

International Input-Output Linkages and Changing Business Cycle Volatility

Trade in Commodities and Business Cycle Volatility

This paper studies the role of differences in the patterns of production and international trade on the business cycle volatility of emerging and developed economies. We study a multisector small open economy in which firms produce and trade commodities and manufactures. We estimate the model to match key cross-sectional and time-series differences across countries. Emerging economies run trade surpluses in commodities and trade deficits in manufactures, while sectoral trade flows are balanced in developed economies. We find that these differences amplify the response of emerging economies to commodity price fluctuations. We show evidence consistent with this mechanism using cross-country data. (JEL E23, E32, F14, F41, F44)

In no uncertain terms: The effect of uncertainty on credit frictions and monetary policy

We examine the interaction of uncertainty and credit frictions in a New Keynesian framework. The model considers credit frictions arising from costly-state verification in the provision of loans to fund the acquisition of capital by entrepreneurs and includes three types of time-varying stochastic volatility shocks related to monetary policy uncertainty, financial risk (micro uncertainty), and macro uncertainty. Key parameters are estimated by the simulated method of moments using data from the United States from 1984:Q1 until 2014:Q4. We find that (1) micro uncertainty has first-order effects that are significantly larger than the effects of macro uncertainty and monetary policy uncertainty; (2) poor credit conditions exacerbate the economic drag from micro uncertainty shocks, amplify the effects of monetary policy shocks, and mitigate the impact of total factor productivity (TFP) shocks; (3) a degree of asymmetry and nonscalability appears in response to monetary policy shocks depending on the degree of nominal rigidities and initial conditions; and (4) monetary policy uncertainty accounts for about one-third of business cycle volatility largely by affecting the size of monetary policy shocks.

Financial development and business cycle volatility nexus in the UAE: Evidence from non‐linear regime‐shift and asymmetric tests

AbstractThis paper analyses the dynamics of financial deepening and the volatility of business cycle in the United Arab of Emirates (UAE). We use cointegration tests of regime‐shift with one and two endogenous structural breaks, respectively, using Gregory and Hansen, Oxford Bulletin of Economics and Statistics, 1996, 58, 555–560 and Hatemi‐J, Empirical Economics, 2008, 35, 497–505 approaches. The asymmetry in the underlying relationship of the concerned variables are examined following NARDL model over the period 1974–2016. The findings suggest the presence of regime shifts in the cointegrating relationship and asymmetry between growth volatility and financial deepening. Furthermore, the paper provides evidence of a significant difference in the response of business cycle to negative or positive changes in the financial deepening, which are more pronounced in the short run. Therefore, the obtained asymmetry suggests that business cycle responses are quick and adverse to changes in the financial system in the UAE. The empirical findings of this paper have potential policy implications in this emerging country that is aiming to establish an international reputation in its financial market and become a regional financial hub.

Global Value Chains, Volatility and Safe Openness: Is Trade a Double-Edged Sword?

Modern production has become increasingly reliant on inputs sourced from abroad. These multi-country production processes are known as global value chains (GVCs). While it is generally accepted that GVCs increase productivity, by allowing producers to reap the gains from their individual comparative advantage, there is disagreement on the effects they have on macroeconomic volatility. In particular, some have argued that GVCs are a ‘double-edged sword’: they increase productivity, but also increase volatility. In this paper, we show that the relationship between GVC integration and volatility is ambiguous in theory, and insignificant in the data. This supports our headline conclusion that there is no compelling reason to fear the double-edged sword: a blanket reduction in GVC integration would impose economic costs without necessarily, or significantly, reducing economic volatility. Another feature of today’s GVCs is their concentration around a few central ‘hubs’. This has led to a discussion of alternative industrial policies that can reshape GVCs in the longer-run, in particular re-shoring and diversification. Within our model, policies to re-shore production lead to an increase in aggregate volatility, as they effectively increase the concentration of value chains on domestic sources. On the other hand, diversification of GVCs among foreign suppliers can lower volatility, by lowering the exposure to any single country. Finally, while the debate around the effects of trade on business-cycle volatility pre-dates the Covid-19 pandemic, recent events have increased the broader discussion of ‘safe trade openness’. We discuss the scope for policy actions to make trade safe and open, drawing out an analogy with the financial sector reforms enacted following the global financial crisis. We emphasise the merits of co-operation and multilateralism in order to underpin safe openness in the global trading system, and caution against direct policy interventions that are not targeted to address well-identified market failures.

Household Economic Exclusion among Danish Children: Evaluating Independent and Joint Risks of Income Poverty and Parental Labor Market Exclusion

Low household income and social exclusion increase children’s risk for unsuccessful transitions to adulthood. Yet we know little about children’s cumulative risk of experiencing poverty and parental labor market exclusion during childhood and to what extent these circumstances co-occur. We estimate annual separate and joint cumulative period risks for experiencing living in a household with income below the Organisation for Economic Cooperation and Development poverty line (poverty) and a low-work intensity household (labor market exclusion) for children in Denmark from 2003 to 2018. Both indicators identify similar children, with the largest overlap between the joint indicator of both poverty and labor market exclusion (economic exclusion) and the income poverty indicator. Furthermore, considering estimates produced from poverty and labor market exclusion measures, as well as from a combined measure, helps us demonstrate the role of business cycle volatility in each: procyclical with respect to poverty and countercyclical with respect labor market exclusion.

English

The purpose of this study is to investigate the business cycle volatility of Turkish economy using the quarterly data over the period 1961:Q1 to 2018:Q4 and to determine the smoothing parameter, λ, of HP filter for annual frequency of observations. The macroeconomic variables such as import, investment and export are more volatile followed by government spending; while consumption and real GDP are less volatile. Price in Turkey is highly volatile, which is about four times as volatile as the average price volatility of South Africa, Japan and USA. Output, consumption and investment in Turkey are twice as volatile as the average volatility of South Africa, Japan and USA. Import and export are more volatile in emerging economies as compared to developed countries. The trend component of annual frequency with λ_annual=6.25 is practically identical to the trend component of the quarterly data with λ_quarterly=1600. In Turkish economy, investment, consumption, import, export, and government spending are procyclical; price and inflation are countercyclical; whereas, the share of government consumption in output is acyclical.   Key words: Business cycle, correlation, Hodrick-Prescott (HP) filters, macroeconomic variables, volatility.

The Nexus between Buyback, Business Cycle, and Stock Market Volatility

Financial crisis shows significant uncertainties in corporate financing conditions. This study draws on economic conditions toask if buyback programs are related to the business cycle and the stock market volatility. The results show both unidirectional and bidirectional causality between buyback, business cycle and stock market volatility. It also shows that financial crisis plays an important role, suggesting that firms increase their buyback depending on their economic condition.

Country size, economic performance and volatility

What are the relationships between country size, economic growth and business cycle volatility? To investigate this question, we developed an original country-size index with principal component analysis. Traditional analysis usually equates country size with population. Our methodology enables to simultaneously consider several factors constitutive of country size: population, GDP and arable land. These additional variables allow us to capture different components of the country size and to control for more than a demographic effect. Using a panel data set of 163 countries for 1960–2007, we find, contrary to Rose (2006), that country size has a significant and negative correlation with economic performance. Our results for output volatility extend the negative and significant relationship found by Furceri and Karras (2007). In addition, we present differentiated results for small and large countries, OECD members, eurozone countries and the so-called BRIC countries.JEL Codes: E42; F36; F42.

Banking Panic Risk and Macroeconomic Uncertainty

We show that systemic risk in the banking sector breeds macroeconomic uncertainty. We develop a model of a production economy with a banking sector where financial constraints of banks can lead to disastrous banking panics. We find that a higher probability of a banking panic increases uncertainty in the aggregate economy. We explore the implications of this banking panic-driven uncertainty for business cycles, asset prices and macroprudential regulation. Banking panic-driven uncertainty amplifies business cycle volatility, increases risk premia on asset prices and yields a new benefit from countercyclical bank capital buffers.

한국 자본시장 정보효율성이 경기변동성에 미치는 영향

본 연구는 경기변동성과 자본시장 정보효율성의 관계를 실증적으로 분석하고자 하였으며, 실증분석을 위해 2000년부터 2018년까지 분기별 경기변동성과 자본시장 정보효율성, 금융발전, 대외 환경을 고려한 변수를 사용하였다. 자본시장 정보효율성은 Delay Measure를 이용한 주식 시장 정보 전달속도를 이용하여 측정하고, 경기변동성은 경기동행지수 순환변동치의 표준편차를 이용하여 측정하였다. 이상의 변수들에 대한 단위근 검정결과, 불안정 시계열과 안정시계열이 혼재되어 있고, 자본시장 정보효율성이 경기변동성에 미치는 장·단기 영향을 파악하기 위해서 ARDL 한 계검정법을 사용하였다.BR 실증분석 결과, 장기적으로 자본시장 정보효율성의 향상은 경기변동성을 증대시키는 것으로 나타났으나, 단기적으로는 통계적으로 유의한 관계가 존재하지 않는것으로 나타났다. 이는 자본시장 정보효율성 변화가 실물시장 미치는 직접적 영향이 아닌 경제주체들의 의사결정 변화를 통해 실물시장에 영향을 미치는 간접적 영향에 따른 결과로 판단된다. 또한 자본시장 정보효율성과 경기변동성의 장기적인 관계가 존재한다는 실증분석 결과를 고려할 때, 최근 소비와 투자의 부진으로 약화된 한국의 경기변동성을 증대시키는 방법으로 자본시장 정보효율성을 향상시킬 필요성이 있다는 함의를 보여주고 있다. 다만, 자본시장 정보효율성의 향상은 대외적으로 부정적인 정보역시 빠르게 전달된다는 것을 의미하므로 지속적인 대외환경 모니터링을 확대·유지해야 할 것이다.

Business Cycle Volatility in Turkey

This study investigates the long-term dynamic relation among the volatility of the business cycles in Turkey and the the current account balance, financial capital flows, terms of trade and money supply volatility. The volatilities of the designated variables are derived by employing ARCH/ GARCH type processes. The ARDL model covering the period 1998Q1:2018Q4 indicates that there is cointegration among the volatilities of the selected variables. The VECM model is formed to investigate dynamic correcting movement in deviations from long-run equilibrium. It is concluded that the volatility of business cycles in Turkey can be explained by the fluctuations in financial capital flows as well as volatilities observed in terms of trade and money supply in the long run.

Understanding the Aggregate Effects of Credit Frictions and Uncertainty

We examine the interaction of uncertainty and credit frictions in a New Keynesian framework. To do so, uncertainty is modeled as time-varying stochastic volatility – the product of monetary policy uncertainty, financial risk (micro-uncertainty), and macrouncertainty. The model is solved using a pruned third-order approximation and estimated by the Simulated Method of Moments. We find that: 1) Micro-uncertainty aggravates the information asymmetry between lenders and borrowers, worsens credit conditions, and has first-order effects on real economic activity. 2) When credit conditions are poor, as indicated by elevated credit spreads, additional micro-uncertainty shocks produce even larger real effects. 3) Poor credit conditions notably affect the transmission mechanism of monetary policy amplifying the real effects of monetary shocks while mitigating the economic boost from TFP shocks. 4) While macro-uncertainty and policy uncertainty exert relatively little direct impact on aggregate economic activity, policy uncertainty accounts for around 40% of the business cycle volatility by affecting the size of monetary policy shocks in the presence of nominal rigidities.

Comovement between the Chinese Business Cycle and Financial Volatility: Based on a DCC-MIDAS Model

ABSTRACT In this paper, we investigate the comovement between the Chinese business cycle and financial variables from 1994 to 2017 using a dynamic conditional correlation-mixed data sample (DCC-MIDAS) model. We analyze the relation and contagion between the business cycle and financial volatility and then construct a DCC-MIDAS model to capture the dynamic relation between the business cycle and financial volatility. Then, we carry out an empirical analysis, finding comovement in the relation and contagion between the Chinese business cycle and financial volatility. Short-term shocks can influence both long-term relations and variations in the correlation coefficients with a lag. An accumulation of short-term shocks can be transformed into a long-term tendency, which explains the dynamically related long-term effect. Constructing this model with high-frequency data captures more information than using low-frequency data, which reveals more profound patterns in the comovement between the business cycle and financial volatility.

Remittances over the business cycle: Theory and evidence

AbstractWe examine the behaviour of remittances over the business cycle and their potential to act as a ‘stabilizer’ during periods of high business cycle volatility. Two main findings are reported. First, remittances are less volatile than other foreign currency flows and do not appear to systemically comove with business cycle fluctuations. Second, remittances are relatively stable even during episodes of sharp business cycle volatility, such as those associated with sudden stops and financial crises. We also provide an overview of the theoretical literature on the implications of different motives to remit for the cyclical behaviour of remittances.