Recession in Business cycle
Author: Snehal Shinde
1.Business cycle duration dependence and foreign recessions.
BONDT, G. and VERMEULEN, P. state that, the duration dependence of expansions and recessions among G7 countries, with an emphasis on the impact of foreign recessions on the end of domestic growth. The findings demonstrate that all G7 countries, except Canada, are much more likely to have a recession, and that foreign recessions have historically enhanced the risk of one. The study also discovers that the likelihood of emerging from a recession is independent of other G7 nations’ recessions, implying that the foreign environment, as well as domestic fiscal and monetary policies, have a significant influence in bringing countries out of recession.
2.The Micro-Origins of Business Cycles: Evidence from German Metropolitan Areas.
Federica Daniele and Heiko Stüber (2023) state that, link between concentration and volatility in a granular economy, focusing on the spatial variation of the economy. The study uses the real business cycle model in Carvalho and Grassi (2019) to analyse aggregate fluctuations with micro-origin. The results show that higher local concentration leads to more persistent local employment and increased vulnerability to granular shocks. Higher concentration also increases the conditional volatility of local employment, suggesting that granularity can predict local turning points. The correlation is not statistically significant for any firm-level data set. The study provides empirical evidence for the existence of granularity-driven business cycles and the potential for granularity to predict local turning points.
3.Core-Periphery Business Cycle Synchronization in Europe and the Great Recession.
DE LUCAS SANTOS et al. (2016) state that, examines the impact of the Great Recession on business cycle synchronization in Europe from 1991Q1 to 2013Q2, using a new testing procedure to detect breaks in parameters related to cyclical common factors and local mean growth. Results show significant structural changes post-recession, with countries showing varying degrees of correlation with cyclical common factors. Most economies experienced a decrease in correlations during the crisis, but synchronization remained high post-2008, suggesting a dilution of the European core-periphery division. The findings have policy implications for common monetary policy within the EMU and contribute to the ongoing debate on currency area optimality.
4.Business Cycle Variation in Short Selling Strategies: Picking During Expansions and Timing During Recessions
Peter N. Dixon and Eric K. Kelley(2022) state that, firm-level short interest is a stronger negative predictor of stock returns during expansions than during recessions. Short sellers also make factor bets more during recessions than during expansions, which tend to pay off as a strong negative relation between the betas of highly shorted stocks and future stock market returns appears. Short-sellers may be better stock pickers in expansions than recessions due to theories of overconfidence. Models associating overconfidence with stock market mispricings and delayed incorporation of rational traders’ beliefs suggest that short sellers exploit their overconfident counterparts during economic expansions. Evidence suggests that a portfolio of highly shorted stocks performs differently in expansions than in recessions, and that stocks with high short interest exhibit negative subsequent earnings announcement returns. Factor exposure of high short interest stocks varies over the business cycle, with high variation in average factor loadings and low cross-stock dispersion in factor loadings.
5.Evolution of Modern Business Cycle Models: Accounting for the Great Recession†.
KEHOE, P. J. et al. (2018) state that, realistic business cycle revolution revolutionized macroeconomic technique by moving away from econometric approaches and toward dynamic stochastic general equilibrium methods. This paradigm stresses modeling individual and business behaviour using maximizing problems, which allows for a variety of ideas and mechanisms. While there are some disagreements, the primary distinguishing feature is the precise problems and methods addressed in these models, which focus on primitive technology, desires, information systems, and limitations.
6.Budgeting during a Recession Phase of the Business Cycle: The Georgia Experience.
LAUTH, T. P. (2003) state that, influence of the national recession on Georgia’s revenue and spending decisions in 2002 and 2003 fiscal years. The state’s strong economy and conservative revenue predicting techniques have generally served as a buffer against revenue deficits throughout the business cycle’s recession phase. However, when state revenue receipts for FY 2002 were 5% lower than the previous fiscal year, many gap-closing measures became essential, including state agency expenditure cuts and the substitution of bond proceeds for tax revenues. These revenue and spending gap-closing methods were designed to allow the governor to implement his policy proposals while keeping the budget balanced. The state’s Rainy Day Fund remained full and was set aside for budget balancing in FY 2004, if necessary. The current recession has made it possible to balance the budget.
7.THE ASYMMETRIC BUSINESS CYCLE.
MORLEY, J. and PIGER, J. (2012) state the measuring of the business cycle using a nonlinear time series model. The findings indicate that recessions are times of substantial and negative temporary swings in output. However, numerous nonlinear model competitors provide measures with vastly different forms and magnitudes. To address this uncertainty, a model-averaged measure of the economic cycle is developed, with an asymmetry shape across NBER-dated recession and boom periods. This metric indicates a good relationship between the output-gap concept of the economic cycle and the NBER’s alternating-phases concept, implying that recessions are periods of considerable temporary variance in production. This study examines the definitions of the business cycle, concentrating on the output-gap perspective. It provides information on model-based trend and cycle breakdown methodologies, competing time.
8.Okun’s Law over the Business Cycle: Was the Great Recession All That Different?
OWYANG, M. T. and SEKHPOSYAN, T. (2012) state that, Okun’s law, a rule of thumb that links unemployment to output growth, has been utilized by policymakers and scholars since 1962. However, other research imply that the link has not been stable over time, and the slow recovery of unemployment in the United States following the Great Recession raises concerns about its long-term viability. The authors analyse whether the Great Recession led to the breakdown of Okun’s law, as well as if the relationship between unemployment and output fluctuations changed considerably between the Great Recession and the subsequent recovery. Okun’s 1962 work on the unemployment-output link proposed that potential output be calculated at full employment, or the non-accelerating rate of unemployment (NAIRU).
9.Lagged country returns and international stock return predictability during business cycle recession periods.
WEN, Y.-C.; LI, B. (2020) state that, international return predictability in the context of NBER recessions, drawing on previous theoretical frameworks and empirical research. By comparing lagged country returns across developed and developing countries from 1970 to 2019, the study concludes that lagged U.S. returns are a better predictor, particularly during NBER recessions, which is consistent with theoretical reasoning. However, when focusing on negative or extreme U.S. returns, the predictive power decreases, implying that certain events may not have a big impact on non-US stock markets. The findings emphasize the significance of business cycle recessions and stock return volatility dynamics, highlighting that return predictability differs across market conditions and is not universally applicable. In practical terms, the study emphasizes the influence of economic downturns on stock market volatility and investor expectations.
10.The business cycle, labour market transitions by age, and the great recession.
XU, H. and COUCH, K. A.(2017) state that, labour force transitions across age groups, with an emphasis on the decades preceding and following the Great Recession. It studies the monthly transitions between employment, unemployment, and nonparticipation of males aged 25 to 55 from 1996 to 2013. Prior to the Great Recession, younger workers were more likely to transition from employment to unemployment, but this difference in responsiveness no longer exists after the recession. The analysis calls into question the interpretation of age-group unemployment rates over the business cycle as being driven by differential hiring and firing, particularly after the Great Recession. The underlying transitions determine the stocks of the aggregates being observed.
It also uses CPS data to investigate labour market transitions between employment, unemployment, and nonparticipation by age.
Conclusion:
In conclusion it can state that the business cycle, has its impact on economic phenomena, and its implications for policy. It identifies granularity-driven cycles, examines the Great Recession’s impact on business cycle synchronization, and explores the predictive power of firm-level short interest. It can also examine the relationship between output gap concepts and NBER-defined business cycle phases, Okun’s Law stability, international stock return predictability, labour market transitions, and age-group unemployment rates. The cyclical nature of the relationship between recessions and the business cycle emphasizes its importance. The interconnected and cyclical nature of recessions within the broader business cycle framework.
References:
BONDT, G.; VERMEULEN, P. Business cycle duration dependence and foreign recessions. Scottish Journal of Political Economy, [s. l.], v. 68, n. 1, p. 1–19, 2021. DOI 10.1111/sjpe.12261. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=182a9e4a-81f1-3978-a745-0d1f2da840f1. Acesso em: 25 fev. 2024.
DANIELE, F.; STÜBER, H. The Micro-Origins of Business Cycles: Evidence from German Metropolitan Areas. Review of Economics & Statistics, [s. l.], v. 105, n. 1, p. 70–85, 2023. DOI 10.1162/rest_a_01005. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=91e393be-a57c-378c-a627-c5c7e3286d7f. Acesso em: 25 fev. 2024.
DE LUCAS SANTOS, S.; DELGADO RODRÍGUEZ, M. J. Core-Periphery Business Cycle Synchronization in Europe and the Great Recession. Eastern European Economics, [s. l.], v. 54, n. 6, p. 521–546, 2016. DOI 10.1080/00128775.2016.1238767. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=12b07f9c-015a-388b-bcc4-1fce5debb33a. Acesso em: 25 fev. 2024.
DIXON, P. N.; KELLEY, E. K. Business Cycle Variation in Short Selling Strategies: Picking During Expansions and Timing During Recessions. Journal of Financial & Quantitative Analysis, [s. l.], v. 57, n. 8, p. 3018–3047, 2022. DOI 10.1017/S0022109022000540. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=778756d1-d328-3f7d-9c21-ed17aa551ee9. Acesso em: 25 fev. 2024.
KEHOE, P. J.; MIDRIGAN, V.; PASTORINO, E. Evolution of Modern Business Cycle Models: Accounting for the Great Recession†. Journal of Economic Perspectives, [s. l.], v. 32, n. 3, p. 141–166, 2018. DOI 10.1257/jep.32.3.141. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=9ef9be04-d19e-36bd-93fc-ece760ab3d36. Acesso em: 25 fev. 2024.
LAUTH, T. P. Budgeting during a Recession Phase of the Business Cycle: The Georgia Experience. Public Budgeting & Finance, [s. l.], v. 23, n. 2, p. 26–38, 2003. DOI 10.1111/1540-5850.2302003. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=36f0c0a2-376c-36e6-8dca-f26610551c92. Acesso em: 25 fev. 2024.
MORLEY, J.; PIGER, J. The Asymmetric Business Cycle. Review of Economics & Statistics, [s. l.], v. 94, n. 1, p. 208–221, 2012. DOI 10.1162/REST_a_00169. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=ed7dcf1b-957a-36ac-97b6-59aa489d6ff4. Acesso em: 25 fev. 2024.
OWYANG, M. T.; SEKHPOSYAN, T. Okun’s Law over the Business Cycle: Was the Great Recession All That Different? Review (00149187), [s. l.], v. 94, n. 5, p. 399–418, 2012. DOI 10.20955/r.94.399-418. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=8fcf8f46-b227-3e84-9ba1-2b9618eb8915. Acesso em: 25 fev. 2024.
WEN, Y.-C.; LI, B. Lagged country returns and international stock return predictability during business cycle recession periods. Applied Economics, [s. l.], v. 52, n. 46, p. 5005–5019, 2020. DOI 10.1080/00036846.2020.1752899. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=ba5890bd-4322-3bc9-8ccd-6b17d4a8f610. Acesso em: 25 fev. 2024.
XU, H.; COUCH, K. A. The business cycle, labor market transitions by age, and the great recession. Applied Economics, [s. l.], v. 49, n. 52, p. 5370–5396, 2017. DOI 10.1080/00036846.2017.1307932. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=c5771c3d-3cd5-3d2f-85ca-5cd239242ef5. Acesso em: 25 fev. 2024.