Dissecting the cycle: a methodological investigation
TL;DR: In this paper, the authors define the cycle as a pattern in the level of aggregate economic activity and develop an algorithm to locate turning points, as well as a new measure of procyclicality.
About: This article is published in Journal of Monetary Economics.The article was published on 2002-03-01. It has received 1432 citations till now.
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TL;DR: Acemoglu et al. as mentioned in this paper studied the impact of financial and political shocks on output in a broad set of countries, particularly whether output losses are recovered from financial or political shocks.
Abstract: Although researchers have documented that many financial crises are associated with severe recessions (Graciela Kaminsky and Carmen Reinhart 1999), very little attention has been paid to whether countries recover from such large negative shocks in the sense that output losses are reversed. A few recent papers show persistent output loss from financial crises in a small set of countries. For instance, Cerra and Saxena (2005a) demonstrate that six Asian countries suffered permanent output loss from the Asian crisis, and Cerra and Saxena (2005b) show that only a tiny fraction of the output loss from Sweden's banking crisis in the early 1990s was recuperated. The graphs in Figure 1 illustrate persistent output loss for selected countries following the 1997-1998 Asian financial crisis and the debt crisis of the early 1980s. In addition to financial crises, many countries experience large negative political shocks, which could include violent conflicts such as civil wars, as well as a deterioration in the country's governance. Such political shocks have the potential for significant disruption to economic activ? ity, as illustrated for a few episodes of civil war (Figure 2). This paper systematically documents the behavior of output following financial and political crises in a large set of 190 countries. While the graphs in Figures 1 and 2 are suggestive, our aim is to formally analyze the impact of financial and political shocks on output in a broad set of countries, particularly whether output losses are recovered. Financial shocks comprise currency, banking, and twin financial crises. For political shocks, we examine civil wars, a deterioration in the quality of political governance, and twin political crises comprising both shocks. We choose civil wars rather than interstate conflicts to ensure that the war occurs on the country's own soil. The military theater for some interstate conflicts may not directly encompass all parties to the conflict. In addition, the increase in wartime spending for an international conflict may boost economic activity in some countries. We also examine the economic impact of a deterioration in a country's political governance or institutional quality. Daron Acemoglu, Simon Johnson, and James Robinson (2001) and Acemoglu et al. (2003) use constraints on the power of the political executive as a measure of institutional quality, and find that it is linked to growth and volatility. Thus, we use this measure to study the shock to political governance. Potential endogeneity of the financial or political crisis is an important issue in estimating the output impact of the crisis. That is, the crisis itself may be a function of a slowdown of economic growth or changes in expectations of future growth. We attempt to address this issue using a few methods that are far from definite, but nonetheless uncover some interesting facts. In particular, we find that the forecasts of growth from an autoregressive model and from consensus surveys are optimistic relative to actual growth occurring during and after a crisis.
1,001 citations
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TL;DR: In this article, the authors used panel data for a large number of countries and found that economic contractions are not followed by offsetting fast recoveries, and long-term growth is negatively linked to volatility.
Abstract: Using panel data for a large number of countries, we find that economic contractions are not followed by offsetting fast recoveries. Trend output lost is not regained, on average. Wars, crises, and other negative shocks lead to absolute divergence and lower long-run growth, whereas we find absolute convergence in expansions. The output costs of political and financial crises are permanent on average, and long-term growth is negatively linked to volatility. These results also imply that panel data studies can help identify the sources of growth and that economic models should be capable of explaining growth and fluctuations within the same framework.
781 citations
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TL;DR: In this article, the interactions between business and financial cycles using an extensive database of over 200 business and 700 financial cycles in 44 countries for the period 1960:1-2007:4.
Abstract: This paper analyzes the interactions between business and financial cycles using an extensive database of over 200 business and 700 financial cycles in 44 countries for the period 1960:1-2007:4. Our results suggest that there are strong linkages between different phases of business and financial cycles. In particular, recessions associated with financial disruption episodes, notably house price busts, tend to be longer and deeper than other recessions. Conversely, recoveries associated with rapid growth in credit and house prices tend to be stronger. These findings emphasize the importance of developments in credit and housing markets for the real economy.
605 citations
Journal Article•
TL;DR: In this article, the authors characterize the financial cycle using turning points and frequency-based filters and show that financial cycle peaks are very closely associated with financial crises, and that the length and amplitude of financial cycle have increased markedly since the mid-1980s.
Abstract: We characterize empirically the financial cycle using two approaches: analysis of turning points and frequency-based filters. We identify the financial cycle with the medium-term component in the joint fluctuations of credit and property prices; equity prices do not fit this picture well. We show that financial cycle peaks are very closely associated with financial crises and that the length and amplitude of the financial cycle have increased markedly since the mid-1980s. We argue that this reflects, in particular, financial liberalization and changes in monetary policy frameworks. So defined, the financial cycle is much longer than the traditional business cycle. Business cycle recessions are much deeper when they coincide with the contraction phase of the financial cycle. We also draw attention to the "unfinished recession" phenomenon: policy responses that fail to take into account the length of the financial cycle may help contain recessions in the short run but at the expense of larger recessions down the road.
508 citations
TL;DR: The authors used data on 14 advanced countries between 1870 and 2008 to study how past credit accumulation impacts key macroeconomic variables such as output, investment, lending, interest rates, and inflation, finding that more credit-intensive expansions tend to be followed by deeper recessions and slower recoveries.
Abstract: Using data on 14 advanced countries between 1870 and 2008 we document two key facts of the modern business cycle: relative to typical recessions, financial crisis recessions are costlier, and more credit-intensive expansions tend to be followed by deeper recessions (in financial crises or otherwise) and slower recoveries. We use local projection methods to condition on a broad set of macro-economic controls to study how past credit accumulation impacts key macro-economic variables such as output, investment, lending, interest rates, and inflation. The facts that we uncover lend support to the idea that financial factors play an important role in the modern business cycle.
480 citations
References
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TL;DR: In this article, the parameters of an autoregression are viewed as the outcome of a discrete-state Markov process, and an algorithm for drawing such probabilistic inference in the form of a nonlinear iterative filter is presented.
Abstract: This paper proposes a very tractable approach to modeling changes in regime. The parameters of an autoregression are viewed as the outcome of a discrete-state Markov process. For example, the mean growth rate of a nonstationary series may be subject to occasional, discrete shifts. The econometrician is presumed not to observe these shifts directly, but instead must draw probabilistic inference about whether and when they may have occurred based on the observed behavior of the series. The paper presents an algorithm for drawing such probabilistic inference in the form of a nonlinear iterative filter
9,189 citations
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1,403 citations
1,308 citations
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01 Jan 1995
TL;DR: In this paper, recursive methods for computing Equilibria of business cycle models are described. But they are not suitable for non-Walrasian economic models with imperfectly competitive product markets.
Abstract: List of IllustrationsList of TablesPrefaceContributors1Economic Growth and Business Cycles12Recursive Methods for Computing Equilibria of Business Cycle Models393Computing Equilibria of Nonoptimal Economies654Models with Heterogeneous Agents985Business Cycles and Aggregate Labor Market Fluctuations1266Household Production in Real Business Cycle Theory1577Money and the Business Cycle1758Non-Walrasian Economies2179Dynamic General Equilibrium Models with Imperfectly Competitive Product Markets24310Asset Pricing Implications of Equilibrium Business Cycle Models29411International Business Cycles: Theory and Evidence33112Policy Analysis in Business Cycle Models357Bibliography393Author Index413Subject Index417
1,199 citations
TL;DR: This paper examined the business cycle properties of a small set of real US macroeconomic time series using a variety of detrending methods and found that both quantitatively and qualitatively "stylized facts" of US business cycles vary widely across detrended methods and that alternative detending filters extract different types of information from the data.
1,023 citations