Asymmetric business cycles : theory and time-series evidence

52 Pages·1995·1.3 MB·English

by  Acemoglu, Daron

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working paper
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ASYMMETRIC BUSINESS CYCLES:
THEORYAND TIME-SERIES EVIDENCE
Daron Acemoglu
Andrew Scott
95-24 Aug. 1995
massachusetts
institute of
technology
50 memorial drive
Cambridge, mass. 02139

ASYMMETRIC BUSINESS CYCLES:
THEORYAND TIME-SERIES EVIDENCE
Daron Acemoglu
Andrew Scott
95-24 Aug. 1995
MASSACHUSETTSINSTITUTE
, --.•ogy
NOV 1 4 1995
95-24
ASYMMETRIC BUSINESS CYCLES:
THEORY AND TIME-SERIES EVIDENCE
Daron Acemoglu
Department of Economics
Massachusetts Institute of Technology
and
Andrew Scott
Institute of Economics and Statistics and AH Souls College,
Oxford University
August 1995
JEL Classification: E32
Keywords: Asymmetries, Cyclical Indicator, Intertemporal Increasing Returns
Regime Shifts, Temporal Agglomeration, Unobserved Components.
Abstract
We
offer a theory ofeconomic fluctuations based on intertemporal increasing returns: agents
who have been active in the past face lower costs of action today. This specification explains the
observed persistence in individual and aggregate output fluctuations even in the presence of i.i.d
shocks, essentially because individuals respond to the same shock differently depending on their
A
recent past experience. feature of our model is that output growth follows an unobserved
components process with special emphasis on an underlying cyclical indicator. The exactprocess for
output, the sharpness ofturning points and the degree of asymmetry are determined by the form that
We
heterogeneity takes. suggesta general formulation formodels with latentcyclical variables which,
under certain assumptions, reduces to a number of state space models that have been successfully
used to model U.S. GNP. Using ourgeneral formulation we findthat allowing forricherheterogeneity
enables us to obtain a better fit to the data and also that U.S. business cycles are asymmetric, with
this asymmetry manifesting itself as steep declines into recession. We estimate a strongly persistent
cyclical component which is not well approximated by discrete regime shifts nor by linear models.
Our estimates of the relative size of intertemporal returns needed to explain U.S. GNP vary but on
the whole are not implausibly large.
WeoweaspecialdebttoJames Hamiltonwhoseinsightfulcomments improvedanearlierversionofthispaper.Wealsothank
Philippe Aghion, Charlie Bean, Ricardo Caballero, Paul David, Steve Durlauf, Vittorio Grilli, Christopher Harris, Rebecca
Henderson, Per Krusell, Jim Malcomson, John Moore, Chris Pissarides, Danny Quah, Kevin Roberts, Donald Robertson,
variousseminarparticipantsandtwoanonymousrefereesforusefulcomments.Remainingerrorsaretheauthors' responsibility.