On the welfare costs of business-cycle fluctuations and economic-growth variation in the 20th century and beyond

The main objective of this paper is to propose a novel setup that allows estimating separately the welfare costs of the uncertainty stemming from business-cycle uctuations and from economic-growth variation, when the two types of shocks associated with them (respectively,transitory and permanent shocks) hit consumption simultaneously. Separating these welfare costs requires dealing with degenerate bivariate distributions. Levis Continuity Theorem and the Disintegration Theorem allow us to adequately de ne the one-dimensional limiting marginal distributions. Under Normality, we show that the parameters of the original marginal distributions are not afected, providing the means for calculating separately the welfare costs of business-cycle uctuations and of economic-growth variation. Our empirical results show that, if we consider only transitory shocks, the welfare cost of business cycles is much smaller than previously thought. Indeed, we found it to be negative - -0:03% of per-capita consumption! On the other hand, we found that the welfare cost of economic-growth variation is relatively large. Our estimate for reasonable preference-parameter values shows that it is 0:71% of consumption US$ 208:98 per person, per year.

Endogenous cycles in a Stiglitz-Weiss economy

The literature on financiaI imperfections and business cycles has focused on propagation mechanisms. In this pape r we model apure reversion mechanism, such that the economy may converge to a two period equilibrium cycle. This mechanism confirms that financiaI imperfections may have a dramatic amplification effect. Unlike in some related models, contracts are complete. Indexation is not assumed away. The welfare properties of a possible stabilizing policy are analyzed. The model i tself is a dynamic extension of the well-known Stigli tz-Weiss model of lending under moral hazard. Although stylized the model still captures some important features of credit cycles.

Trade and Business Cycle Correlations in Asia-Pacific

Recent empirical studies challenge the traditional theory of optimum currency areas by arguing that a monetary union enhances trade and business cycle co-movements among its member countries sufficiently as to obviate the need for national monetary policy. This paper examines the empirical relationship between trade and business cycle correlations among thirteen Asia-Pacific countries, paying particular attention to the structural characteristics of their economies and other issues not explored fully in the literature. According to our result, although trade is relevant to the business cycles of individual countries, the main determinant of their international correlations is not the geographical structure of their trade but what they produce and export --more specifically the extent to which their output and exports are concentrated on electronic products.

Inflation targeting in Korea, Indonesia, Thailand, and the Philippines : the impact on business cycle synchronization between each country and the world

This paper empirically analyzes whether and to what extent the adoption of inflation targeting (IT) in Korea, Indonesia, Thailand and the Philippines has affected their business cycle synchronization with the rest of the world. By employing the dynamic conditional correlation (DCC) model developed by Engle (2002), we find that IT in Asia has little effect on international business cycle synchronization and the effect is positive in some of the countries, if any. These findings basically seem to be consistent with the evidence from relevant literature.

Economic cycles, asymmetric crises and tourism competitiveness: emerging versus mature destinations

This paper considers the influence of business cycles and economic crises on tourism destinations competitiveness. This competitiveness is measured by its share in world tourism. Analysing a period of forty years, the differential permanent or temporary effects that economic crises has on competitiveness of mature and emerging destinations are observed. Furthermore, it identifies the economic transmission mechanisms operating within this context, analysing them using the framework of the most relevant explanatory models of tourism destination competitiveness. The preliminary results obtained suggest that the effects of these shocks on competitiveness are not neutral. In mature destinations the negative effects are more persistent in highly intensive crises. In emerging destinations with a growing natural trend on tourism demand, the effects of the economic crises are softer and limited, reinforcing the process of convergence between destinations. This effect works through two basic transmission mechanisms: the reduction of internal and external tourism demand and the decrease on investment.

Energy related innovation, the missing link? : a revision and integration of the business cycle theories of Keynes and Schumpeter /

"To be presented at the Sixteenth International Atlantic Economic Conference, Philadelphia, Pennsylvania, October 6-9, 1983."

Business conditions analysis.

Mode of access: Internet.

Exploring the dimensions and transactional outcomes of incomplete business contracts

With an increased emphasis on outsourcing and shortening business cycles, contracts between firms have become more important. Carefully written contracts contribute to the efficiency and longevity of inter-firm relationships as they may constrain opportunism and are often a less costly governance mechanism than maintaining complex social relationships (Larson 1992). This exploratory examination adds to our understanding of how incomplete contracts affect interorganizational exchange. First, we consider the multiple dimensions of contract constraints (safeguards). We also investigate the extent that constraints affect decisions to enforce the relationship by delaying payments, and whether the decision is efficient. Finally, we examine the extent the constraints are effective (and ineffective) at reducing transaction problems associated with enforcement. Based on 971 observations of transactions using explicit, written terms and other secondary data in the context of IT transaction in The Netherlands we test our research propositions.

A New Method For Combining Detrending Techniques with Application to Business Cycle Synchronization of the New EU Members

Decomposing output into trend and cyclical components is an uncertain exercise and depends on the method applied. It is an especially dubious task for countries undergoing large structural changes, such as transition countries. Despite their deficiencies, however, univariate detrending methods are frequently adopted for both policy oriented and academic research. This paper proposes a new procedure for combining univariate detrending techniques which is based on revisions of the estimated output gaps adjusted by the variance of and the correlation among output gaps. The procedure is applied to the study of the similarity of business cycles between the euro area and new EU Member States.

Fiscal Divergence and Business Cycle Synchronization: Irresponsibility is Idiosyncratic

Using a panel of 21 OECD countries and 40 years of annual data, we find that countries with similar government budget positions tend to have business cycles that fluctuate more closely. That is, fiscal convergence (in the form of persistently similar ratios of government surplus/deficit to GDP) is systematically associated with more synchronized business cycles. We also find evidence that reduced fiscal deficits increase business cycle synchronization. The Maastricht "convergence criteria," used to determine eligibility for EMU, encouraged fiscal convergence and deficit reduction. They may thus have indirectly moved Europe closer to an optimum currency area, by reducing countries’ abilities to create idiosyncratic fiscal shocks. Our empirical results are economically and statistically significant, and robust.

A fiskális divergencia és a konjunktúraciklusok együttmozgása - a felelőtlen fiskális politika az aszimmetrikus sokkok forrása (Fiscal divergence and business cycle synchronization: irresponsibility is idiosyncratic)

A világ 115 országának - köztük 21 OECD-tagország - 40 évnyi adatait vizsgálva, arra a következtetésre jutottunk, hogy a hasonló állami költségvetési pozíciójú országok konjunktúraciklusai között szorosabb együttmozgás mutatható ki. Azaz, a fiskális konvergenciát (amelyet a költségvetési egyenleg GDP-hez viszonyt arányának konvergenciájaként definiáltunk) összehangoltabb konjunktúraciklusokkal lehet összefüggésbe hozni. Kutatásaink során arra is találtunk bizonyítékot, hogy a kisebb mértékű költségvetési deficitek növelik a konjunktúraciklusok együttmozgását. A maastrichti konvergenciakritériumok - amelyek az európai monetáris unió követelményeinek való megfelelést hivatottak meghatározni - a fiskális konvergenciát és a költségvetési deficit csökkentését ösztönözték, s ezzel közvetett módon hozzásegítették Európát egy optimális valutaövezet létrehozásához azáltal, hogy csökkent az egyes országok lehetősége a felelőtlen fiskális politika által gerjesztett sokkhatások létrehozására. Az általunk feltárt empirikus eredmények gazdasági és statisztikai szempontból is szignifikánsak és robusztusak. _____ Using panels of 115 countries of world – including 21 OECD countries – and 40 years of annual data, the authors find that countries with similar government budget positions tend to have business cycles that fluctuate more closely. Thus fiscal convergence (in the form of persistently similar ratios of government surplus/deficit to GDP) is systemati-cally associated with more strongly synchronized business cycles. Evidence is also found that reduced fiscal deficits increase business-cycle synchronization. The Maastricht "con-vergence criteria", used to determine eligibility for EMU, encouraged fiscal convergence and deficit reduction. So they may, indirectly, have moved Europe closer to an optimum currency area, by reducing countries abilities to create idiosyncratic fiscal shocks. The empirical results of the study are economically and statistically significant, and robust.

A study of stock market fluctuations and their relation to business conditions

Most research on stock prices is based on the present value model or the more general consumption-based model. When applied to real economic data, both of them are found unable to account for both the stock price level and its volatility. Three essays here attempt to both build a more realistic model, and to check whether there is still room for bubbles in explaining fluctuations in stock prices. In the second chapter, several innovations are simultaneously incorporated into the traditional present value model in order to produce more accurate model-based fundamental prices. These innovations comprise replacing with broad dividends the more narrow traditional dividends that are more commonly used, a nonlinear artificial neural network (ANN) forecasting procedure for these broad dividends instead of the more common linear forecasting models for narrow traditional dividends, and a stochastic discount rate in place of the constant discount rate. Empirical results show that the model described above predicts fundamental prices better, compared with alternative models using linear forecasting process, narrow dividends, or a constant discount factor. Nonetheless, actual prices are still largely detached from fundamental prices. The bubblelike deviations are found to coincide with business cycles. The third chapter examines possible cointegration of stock prices with fundamentals and non-fundamentals. The output gap is introduced to form the nonfundamental part of stock prices. I use a trivariate Vector Autoregression (TVAR) model and a single equation model to run cointegration tests between these three variables. Neither of the cointegration tests shows strong evidence of explosive behavior in the DJIA and S&P 500 data. Then, I applied a sup augmented Dickey-Fuller test to check for the existence of periodically collapsing bubbles in stock prices. Such bubbles are found in S&P data during the late 1990s. Employing econometric tests from the third chapter, I continue in the fourth chapter to examine whether bubbles exist in stock prices of conventional economic sectors on the New York Stock Exchange. The ‘old economy’ as a whole is not found to have bubbles. But, periodically collapsing bubbles are found in Material and Telecommunication Services sectors, and the Real Estate industry group.

The effect of the business cycle on the performance of socially responsible equity mutual funds

The current study applies a two-state switching regression model to examine the behavior of a hypothetical portfolio of ten socially responsible (SRI) equity mutual funds during the expansion and contraction phases of US business cycles between April 1991 and June 2009, based on the Carhart four-factor model, using monthly data. The model identified a business cycle effect on the performance of SRI equity mutual funds. Fund returns were less volatile during expansion/peaks than during contraction/troughs, as indicated by the standard deviation of returns. During contraction/troughs, fund excess returns were explained by the differential in returns between small and large companies, the difference between the returns on stocks trading at high and low Book-to-Market Value, the market excess return over the risk-free rate, and fund objective. During contraction/troughs, smaller companies offered higher returns than larger companies (ci = 0.26, p = 0.01), undervalued stocks out-performed high growth stocks (h i = 0.39, p <0.0001), and funds with growth objectives out-performed funds with other objectives (oi = 0.01, p = 0.02). The hypothetical SRI portfolio was less risky than the market (bi = 0.74, p <0.0001). During expansion/peaks, fund excess returns were explained by the market excess return over the risk-free rate, and fund objective. Funds with other objectives, such as balanced funds and income funds out-performed funds with growth objectives (oi = −0.01, p = 0.03). The hypothetical SRI portfolio exhibited similar risk as the market (bi = 0.93, p <0.0001). The SRI investor adds a third criterion to the risk and return trade-off of traditional portfolio theory. This constraint is social performance. The research suggests that managers of SRI equity mutual funds may diminish value by using social and ethical criteria to select stocks, but add value by superior stock selection. The result is that the performance of SRI mutual funds is very similar to that of the market. There was no difference in the value added among secular SRI, religious SRI, and vice screens.

A Study of Stock Market Fluctuations and their Relations to Business Conditions

Most research on stock prices is based on the present value model or the more general consumption-based model. When applied to real economic data, both of them are found unable to account for both the stock price level and its volatility. Three essays here attempt to both build a more realistic model, and to check whether there is still room for bubbles in explaining fluctuations in stock prices. In the second chapter, several innovations are simultaneously incorporated into the traditional present value model in order to produce more accurate model-based fundamental prices. These innovations comprise replacing with broad dividends the more narrow traditional dividends that are more commonly used, a nonlinear artificial neural network (ANN) forecasting procedure for these broad dividends instead of the more common linear forecasting models for narrow traditional dividends, and a stochastic discount rate in place of the constant discount rate. Empirical results show that the model described above predicts fundamental prices better, compared with alternative models using linear forecasting process, narrow dividends, or a constant discount factor. Nonetheless, actual prices are still largely detached from fundamental prices. The bubble-like deviations are found to coincide with business cycles. The third chapter examines possible cointegration of stock prices with fundamentals and non-fundamentals. The output gap is introduced to form the non-fundamental part of stock prices. I use a trivariate Vector Autoregression (TVAR) model and a single equation model to run cointegration tests between these three variables. Neither of the cointegration tests shows strong evidence of explosive behavior in the DJIA and S&P 500 data. Then, I applied a sup augmented Dickey-Fuller test to check for the existence of periodically collapsing bubbles in stock prices. Such bubbles are found in S&P data during the late 1990s. Employing econometric tests from the third chapter, I continue in the fourth chapter to examine whether bubbles exist in stock prices of conventional economic sectors on the New York Stock Exchange. The ‘old economy’ as a whole is not found to have bubbles. But, periodically collapsing bubbles are found in Material and Telecommunication Services sectors, and the Real Estate industry group.

Essays on Macroeconomic Trends and Cycles

This dissertation describes two studies on macroeconomic trends and cycles. The first chapter studies the impact of Information Technology (IT) on the U.S. labor market. Over the past 30 years, employment and income shares of routine-intensive occupations have declined significantly relative to nonroutine occupations, and the overall U.S. labor income share has declined relative to capital. Furthermore, the decline of routine employment has been largely concentrated during recessions and ensuing recoveries. I build a model of unbalanced growth to assess the role of computerization and IT in driving these labor market trends and cycles. I augment a neoclassical growth model with exogenous IT progress as a form of Routine-Biased Technological Change (RBTC). I show analytically that RBTC causes the overall labor income share to follow a U-shaped time path, as the monotonic decline of routine labor share is increasingly offset by the monotonic rise of nonroutine labor share and the elasticity of substitution between the overall labor and capital declines under IT progress. Quantitatively, the model explains nearly all the divergence between routine and nonroutine labor in the period 1986-2014, as well as the mild decline of the overall labor share between 1986 and the early 2000s. However, the model with IT progress alone cannot explain the accelerated decline of labor income share after the early 2000s, suggesting that other factors, such as globalization, may have played a larger role in this period. Lastly, when nonconvex labor adjustment costs are present, the model generates a stepwise decline in routine labor hours, qualitatively consistent with the data. The timing of these trend adjustments can be significantly affected by aggregate productivity shocks and concentrated in recessions. The second chapter studies the implications of loss aversion on the business cycle dynamics of aggregate consumption and labor hours. Loss aversion refers to the fact that people are distinctively more sensitive to losses than to gains. Loss averse agents are very risk averse around the reference point and exhibit asymmetric responses to positive and negative income shocks. In an otherwise standard Real Business Cycle (RBC) model, I study loss aversion in both consumption alone and consumption-and-leisure together. My results indicate that how loss aversion affects business cycle dynamics depends critically on the nature of the reference point. If, for example, the reference point is status quo, loss aversion dramatically lowers the effective inter-temporal rate of substitution and induces excessive consumption smoothing. In contrast, if the reference point is fixed at a constant level, loss aversion generates a flat region in the decision rules and asymmetric impulse responses to technology shocks. Under a reasonable parametrization, loss aversion has the potential to generate asymmetric business cycles with deeper and more prolonged recessions.