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What shocks account for the business cycle frequency and long run movements of output and prices? This paper addresses this question using the identifying assumption that only supply shocks, such as shocks to technology, oil prices, and labor supply affect output in the long run. Real and monetary aggregate demand shocks can affect output, but only in the short run. This assumption sufficiently restricts the reduced form of key macroeconomic variables to allow estimation of the shocks and their effect on output and price at all frequencies. Aggregate demand shocks account for about twenty to thirty percent of output fluctuations at business cycle frequencies. Technological shocks account for about one-quarter of cyclical fluctuations, and about one-third of output's variance at low frequencies. Shocks to oil prices are important in explaining episodes in the 1970's and 1980's. Shocks that permanently affect labor input account for the balance of fluctuations in output, namely, about half of its variance at all frequencies.
Traditionally, economic growth and business cycles have been treated independently. However, the dependence of GDP levels on its history of shocks, what economists refer to as “hysteresis,” argues for unifying the analysis of growth and cycles. In this paper, we review the recent empirical and theoretical literature that motivate this paradigm shift. The renewed interest in hysteresis has been sparked by the persistence of the Global Financial Crisis and fears of a slow recovery from the Covid-19 crisis. The findings of the recent literature have far-reaching conceptual and policy implications. In recessions, monetary and fiscal policies need to be more active to avoid the permanent scars of a downturn. And in good times, running a high-pressure economy could have permanent positive effects.
This volume presents the most complete collection available of the work of Victor Zarnowitz, a leader in the study of business cycles, growth, inflation, and forecasting.. With characteristic insight, Zarnowitz examines theories of the business cycle, including Keynesian and monetary theories and more recent rational expectation and real business cycle theories. He also measures trends and cycles in economic activity; evaluates the performance of leading indicators and their composite measures; surveys forecasting tools and performance of business and academic economists; discusses historical changes in the nature and sources of business cycles; and analyzes how successfully forecasting firms and economists predict such key economic variables as interest rates and inflation.
The ups and downs of booms and slumps, often referred to as business cycles, are features of all modern economies. This book considers business cycles over three epochs 1870-1913, 1919-1938 and the post-World War II period. It provides an analysis of the key macroeconomic questions relating to economic fluctuations. Why are the ups and down more volatile in some epochs than others? Why are some business cycle shocks more persistent in their effects? Is there an international business cycle? Can present business cycle features predict future patterns? What impact will institutional changes, such as EMU have on future fluctuations?
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.
This thesis studies the importance of non-fundamental factors in economic and financial fluctuations. In particular, it studies how the economy responds to changes in expectations about economic fundamentals, independently of actual changes in those fundamentals, and to what extent financial fluctuations in one country spillover to other countries. The first chapter investigates how the economy reacts to the arrival of news about future technological progress. I find that the economy expands following a so-called news shock, but the bulk of the effect is delayed until technology starts to actually improve. News shocks explain around 30 percent of business cycle fluctuations, while their role is more important for explaining variations in forward-looking variables, such as stock prices and the term spread. In the second chapter, jointly written with Stephane Dées, studies the importance of animal spirits - defined as changes in expectations not supported by changes in fundamentals - for producing business cycles. We find that animal spirits are more important for business cycle fluctuations than permanent shocks. We use a novel identification scheme in a vector-autoregressive framework that exploits the fact that the econometrician has a richer data-set than consumers. In the third chapter, jointly written with Roberto De Santis, studies the extent and direction of spillovers, contagion and connectedness in European and US sovereign debt markets from 2005 to 2014. We use a new method that allows us to identify orthogonal country specific shocks in a panel of countries, employing restrictions on the relative size of the contemporaneous impact effect. We find that connectedness declined steadily between 2009 and 2012, indicating increased financial fragmentation. We find that Greece was a key source of systemic risk in 2010, explaining 20-30% of the variance of sovereign yields in stressed countries, while in 2011-2012 Italy, not Spain, was a key source of systemic risk.
This is a concise and and up-to-date survey of business cycles, discussing not only early theories of the business cycle and Keynesian and monetarist models, but also the rational expectationist and new Keynesian models along with actual business cycles. Hall traces the history of business cycles from the panic of 1907 to the long cyclical expansion beginning in late 1982. ISBN 0-275-93085-8: $39.95.