File Name: nominal price rigidity money supply endogeneity and business cycles .zip
Press Release. Accordingly, the inflation target needs to be fixed in alignment with trend inflation to avoid unhinging inflation expectations and flattening the aggregate supply curve or imparting a deflationary bias to the economy. Results from a regime switching model applied to a hybrid New Keynesian Philips curve suggest a steady decline in trend inflation since to 4.
- Business cycle
- Monetary Business Cycle Models (Sticky Prices and Wages)
- Monetary Business Cycle Models (Sticky Prices and Wages)
This paper develops and estimates a dynamic stochastic general equilibrium model of a small open economy which approximately accounts for the empirical evidence concerning the monetary transmission mechanism, as summarized by impulse response functions derived from an estimated structural vector autoregressive model, while dominating that structural vector autoregressive model in terms of predictive accuracy.
Amable, L. Demmou, and D. Gatti , Employment performance and institutions: New answers to an old question , Andolfatto , Business cycles and labor-market search , American Economic Review , vol.
The business cycle , also known as the economic cycle or trade cycle , are the fluctuations of gross domestic product GDP around its long-term growth trend. These fluctuations typically involve shifts over time between periods of relatively rapid economic growth expansions or booms and periods of relative stagnation or decline contractions or recessions.
Business cycles are usually measured by considering the growth rate of real gross domestic product. Despite the often-applied term cycles , these fluctuations in economic activity may or may not exhibit uniform or predictable periodicity. The common or popular usage boom-and-bust cycle refers to fluctuations in which the expansion is rapid and the contraction severe.
The current view of mainstream economics is that business cycles are essentially the summation of purely random shocks to the economy and thus are not, in fact, cycles, despite appearing to be so. However, certain heterodox schools propose alternative theories suggesting that cycles do in fact exist due to endogenous causes. Sismondi found vindication in the Panic of , which was the first unarguably international economic crisis, occurring in peacetime.
Sismondi and his contemporary Robert Owen , who expressed similar but less systematic thoughts in Report to the Committee of the Association for the Relief of the Manufacturing Poor, both identified the cause of economic cycles as overproduction and underconsumption , caused in particular by wealth inequality. They advocated government intervention and socialism , respectively, as the solution.
This work did not generate interest among classical economists, though underconsumption theory developed as a heterodox branch in economics until being systematized in Keynesian economics in the s. Sismondi's theory of periodic crises was developed into a theory of alternating cycles by Charles Dunoyer ,  and similar theories, showing signs of influence by Sismondi, were developed by Johann Karl Rodbertus. Periodic crises in capitalism formed the basis of the theory of Karl Marx , who further claimed that these crises were increasing in severity and, on the basis of which, he predicted a communist revolution.
Though only passing references in Das Kapital refer to crises, they were extensively discussed in Marx's posthumously published books, particularly in Theories of Surplus Value. In Progress and Poverty , Henry George focused on land 's role in crises — particularly land speculation — and proposed a single tax on land as a solution.
Schumpeter's Juglar model associates recovery and prosperity with increases in productivity, consumer confidence , aggregate demand , and prices. In the 20th century, Schumpeter and others proposed a typology of business cycles according to their periodicity, so that a number of particular cycles were named after their discoverers or proposers: . Some say interest in the different typologies of cycles has waned since the development of modern macroeconomics , which gives little support to the idea of regular periodic cycles.
Others, such as Dmitry Orlov , argue that simple compound interest mandates the cycling of monetary systems. Since , World GDP has increased by fifty-nine times, and these multiples have not even kept up with annual inflation over the same period. Social Contract freedoms and absence of social problems collapses may be observed in nations where incomes are not kept in balance with cost-of-living over the timeline of the monetary system cycle.
The Bible BCE and Hammurabi 's Code BCE both explain economic remediations for cyclic sixty-year recurring great depressions, via fiftieth-year Jubilee biblical debt and wealth resets [ citation needed ]. Thirty major debt forgiveness events are recorded in history including the debt forgiveness given to most European nations in the s to There were great increases in productivity , industrial production and real per capita product throughout the period from to that included the Long Depression and two other recessions.
Both the Long and Great Depressions were characterized by overcapacity and market saturation. Over the period since the Industrial Revolution, technological progress has had a much larger effect on the economy than any fluctuations in credit or debt, the primary exception being the Great Depression, which caused a multi-year steep economic decline.
See: Productivity improving technologies historical. There were frequent crises in Europe and America in the 19th and first half of the 20th century, specifically the period — This period started from the end of the Napoleonic wars in , which was immediately followed by the Post-Napoleonic depression in the United Kingdom —30 , and culminated in the Great Depression of —39, which led into World War II.
See Financial crisis: 19th century for listing and details. The first of these crises not associated with a war was the Panic of In this period, the economic cycle — at least the problem of depressions — was twice declared dead. The first declaration was in the late s, when the Phillips curve was seen as being able to steer the economy.
However, this was followed by stagflation in the s, which discredited the theory. The second declaration was in the early s, following the stability and growth in the s and s in what came to be known as The Great Moderation.
Notably, in , Robert Lucas , in his presidential address to the American Economic Association , declared that the "central problem of depression-prevention [has] been solved, for all practical purposes. Various regions have experienced prolonged depressions , most dramatically the economic crisis in former Eastern Bloc countries following the end of the Soviet Union in For several of these countries the period — has been an ongoing depression, with real income still lower than in In , economists Arthur F.
Burns and Wesley C. Mitchell provided the now standard definition of business cycles in their book Measuring Business Cycles : . Business cycles are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises: a cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle; in duration, business cycles vary from more than one year to ten or twelve years; they are not divisible into shorter cycles of similar characteristics with amplitudes approximating their own.
According to A. Burns: . Business cycles are not merely fluctuations in aggregate economic activity. The critical feature that distinguishes them from the commercial convulsions of earlier centuries or from the seasonal and other short term variations of our own age is that the fluctuations are widely diffused over the economy — its industry, its commercial dealings, and its tangles of finance. The economy of the western world is a system of closely interrelated parts.
He who would understand business cycles must master the workings of an economic system organized largely in a network of free enterprises searching for profit. The problem of how business cycles come about is therefore inseparable from the problem of how a capitalist economy functions. An expansion is the period from a trough to a peak and a recession as the period from a peak to a trough.
The NBER identifies a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production". There is often a close timing relationship between the upper turning points of the business cycle, commodity prices, and freight rates, which is shown to be particularly tight in the grand peak years of , , and Numerous metrics are proposed to identify the business cycle, such as unemployment, stock market returns, and household spending rate.
Series used to infer the underlying business cycle fall into three categories: lagging, coincident, and leading. Most are results of the cycle instead of the reason for the cycle, and thus lag. Economists and investors alike speculate which series may lead the business cycle, providing advanced warning of changes and an advantage in information. A prominent coincident, or real-time, business cycle indicator is the Aruoba-Diebold-Scotti Index.
Recent research employing spectral analysis has confirmed the presence of Kondratiev waves in the world GDP dynamics at an acceptable level of statistical significance. Recurrence quantification analysis has been employed to detect the characteristic of business cycles and economic development.
To this end, Orlando et al. The said index has been proven to detect hidden changes in time series. Further, Orlando et al. Last but not least, it has been demonstrated that recurrence quantification analysis can detect differences between macroeconomic variables and highlight hidden features of economic dynamics.
The Business Cycle follows changes in stock prices which are mostly caused by external factors such as socioeconomic conditions, inflation, exchange rates. Intellectual capital does not affect a company stock's current earnings. Intellectual capital contributes to a stock's return growth.
In recent years economic theory has moved towards the study of economic fluctuation rather than a "business cycle"  — though some economists use the phrase 'business cycle' as a convenient shorthand. For example, Milton Friedman said that calling the business cycle a "cycle" is a misnomer , because of its non-cyclical nature.
Friedman believed that for the most part, excluding very large supply shocks, business declines are more of a monetary phenomenon. The explanation of fluctuations in aggregate economic activity is one of the primary concerns of macroeconomics and a variety of theories have been proposed to explain them. Within economics, it has been debated as to whether or not the fluctuations of a business cycle are attributable to external exogenous versus internal endogenous causes.
In the first case shocks are stochastic, in the second case shocks are deterministically chaotic and embedded in the economic system. These may also broadly be classed as "supply-side" and "demand-side" explanations: supply-side explanations may be styled, following Say's law , as arguing that " supply creates its own demand ", while demand-side explanations argue that effective demand may fall short of supply, yielding a recession or depression. This debate has important policy consequences: proponents of exogenous causes of crises such as neoclassicals largely argue for minimal government policy or regulation laissez faire , as absent these external shocks, the market functions, while proponents of endogenous causes of crises such as Keynesians largely argue for larger government policy and regulation, as absent regulation, the market will move from crisis to crisis.
This division is not absolute — some classicals including Say argued for government policy to mitigate the damage of economic cycles, despite believing in external causes, while Austrian School economists argue against government involvement as only worsening crises, despite believing in internal causes.
The view of the economic cycle as caused exogenously dates to Say's law , and much debate on endogeneity or exogeneity of causes of the economic cycle is framed in terms of refuting or supporting Say's law; this is also referred to as the " general glut " supply in relation to demand debate. Until the Keynesian revolution in mainstream economics in the wake of the Great Depression , classical and neoclassical explanations exogenous causes were the mainstream explanation of economic cycles; following the Keynesian revolution, neoclassical macroeconomics was largely rejected.
There has been some resurgence of neoclassical approaches in the form of real business cycle RBC theory. The debate between Keynesians and neo-classical advocates was reawakened following the recession of Mainstream economists working in the neoclassical tradition, as opposed to the Keynesian tradition, have usually viewed the departures of the harmonic working of the market economy as due to exogenous influences, such as the State or its regulations, labor unions, business monopolies, or shocks due to technology or natural causes.
The 19th-century school of underconsumptionism also posited endogenous causes for the business cycle, notably the paradox of thrift , and today this previously heterodox school has entered the mainstream in the form of Keynesian economics via the Keynesian revolution.
Mainstream economics views business cycles as essentially "the random summation of random causes". In , Eugen Slutzky observed that summing random numbers, such as the last digits of the Russian state lottery, could generate patterns akin to that we see in business cycles, an observation that has since been repeated many times.
This caused economists to move away from viewing business cycles as a cycle that needed to be explained and instead viewing their apparently cyclical nature as a methodological artefact. This means that what appear to be cyclical phenomena can actually be explained as just random events that are fed into a simple linear model.
Thus business cycles are essentially random shocks that average out over time. Mainstream economists have built models of business cycles based the idea that they are caused by random shocks.
While economists have found it difficult to forecast recessions or determine their likely severity, research indicates that longer expansions do not cause following recessions to be more severe. According to Keynesian economics , fluctuations in aggregate demand cause the economy to come to short run equilibrium at levels that are different from the full employment rate of output. These fluctuations express themselves as the observed business cycles. Keynesian models do not necessarily imply periodic business cycles.
However, simple Keynesian models involving the interaction of the Keynesian multiplier and accelerator give rise to cyclical responses to initial shocks. Paul Samuelson 's "oscillator model"  is supposed to account for business cycles thanks to the multiplier and the accelerator.
The amplitude of the variations in economic output depends on the level of the investment, for investment determines the level of aggregate output multiplier , and is determined by aggregate demand accelerator.
In the Keynesian tradition, Richard Goodwin  accounts for cycles in output by the distribution of income between business profits and workers' wages. The fluctuations in wages are almost the same as in the level of employment wage cycle lags one period behind the employment cycle , for when the economy is at high employment, workers are able to demand rises in wages, whereas in periods of high unemployment, wages tend to fall.
According to Goodwin, when unemployment and business profits rise, the output rises. One alternative theory is that the primary cause of economic cycles is due to the credit cycle : the net expansion of credit increase in private credit, equivalently debt, as a percentage of GDP yields economic expansions, while the net contraction causes recessions, and if it persists, depressions.
In particular, the bursting of speculative bubbles is seen as the proximate cause of depressions, and this theory places finance and banks at the center of the business cycle.
Monetary Business Cycle Models (Sticky Prices and Wages)
Acemoglu , Introduction to Modern Economic Growth , Akerlof and J. Supplement , pp. DOI : An and F.
Acosta, E. Lartey, and F. DOI : Aizenman, E. Sebastian, and D.
Monetary Business Cycle Models (Sticky Prices and Wages)
Course Type : Graduate 1st Year. Course Description : This course introduces theoretical and methodological underpinnings of modern macroeconomics. Programming Languages Used : Matlab, Dynare. Note 1 : A chapter by Fernandez-Villaverde, Rubio-Ramirez, and Schorfheide covers many topics we will go through in this course.