the american business cycle continuity and change in recent decades the american economy has experienced the worst peace time inflation in its history and the highest unemployment rate since the great depression these circumstances have prompted renewed interest in the concept of business cycles which joseph schumpeter suggested are like the beat of the heart of the essence of the organism that displays them in the american business cycle some of the most prominent macroeconomics in the united states focuses on the questions to what extent are business cycles propelled by external shocks how have post 1946 cycles differed from earlier cycles and what are the major factors that contribute to business cycles they extend their investigation in some areas as far back as 1875 to afford a deeper understanding of both economic history and the most recent economic fluctuations seven papers address specific aspects of economic activity consumption investment inventory change fiscal policy monetary behavior open economy and the labor market five papers focus on aggregate economic activity in a number of cases the papers present findings that challenge widely accepted models and assumptions in addition to its substantive findings the american business cycle includes an appendix containing both the first published history of the nber business cycle dating chronology and many previously unpublished historical data series

variability in the effects of monetary policy on economic activity this paper documents and interprets the variability in the effects of monetary policy on economic activity using the method of rolling vector autoregression and united states data from 1959 01 to 1994 12 while i find robust support for short run price stickiness and long run output neutrality i also find that the responses of output and price levels to monetary shocks are otherwise quite variable seven episodes of differing responses are identified the effects of monetary policy are found to be stronger when monetary shocks are negative and are related to some gradual changes in the economy

monetary policy in the presence of asymmetric wage indexation we study optimal monetary policy in the presence of asymmetric wage indexation we find that the monetary authorities do not react to small output shocks and that their reaction to large shocks is asymmetric insofar as they absorb positive shocks more than negative ones as a consequence we observe that asymmetric wage indexation can be contractionary it has ambiguous effects on expected inflation and welfare relative to an equivalent symmetric indexation optimal symmetric inflation however always outperforms optimal asymmetric indexation

performance indicators in higher education a survey of recent work this article surveys recent work on the construction of performance indicators in higher education focusing particular attention on degree results student wastage and research output performance indicators ought to provide measures of value added by the various institutions under review as such crude measures of output which fail to take account of input differences across institutions are inappropriate so it is necessary to investigate what factors underlie inter institution differences in measured output in order to correct for input variations in assessing overall performance the absence of market prices for teaching and research outputs severely hinders the construction of composite measures of the performance of higher education institutions since in their absence no objective weights can be assigned to the different roles of these institutions the resource implications of performance measurement exercises need to be clarified if rankings exercises are to have the desired incentive effects copyright 1992 by oxford university press

friedman s plucking model of business fluctuations tests and estimates of permanent and transitory components in milton friedman s model output cannot exceed a ceiling level but occasionally is plucked downward by recession implying fluctuations are asymmetric recessions transitory and recessions duration dependent though expansions are not the empirical literature lends support but formal modeling has been absent the econometric model presented here encompasses both plucking and symmetric fluctuations around a stochastic trend we find gdp is well characterized by the plucking model implied recessions correspond to nber reference cycles and no role for symmetric cycles decomposition of the unemployment rate reveals a corresponding asymmetry and timing paths of ceiling output and trend unemployment are presented

borrowing constraints and progress through school evidence from peru this paper investigates the effect of borrowing constraints on the timing of human capital investment in a developing country by looking at how quickly children with different family backgrounds progress through the primary school system in peru the main findings are that children start withdrawing from school earlier as indicated by repetition of grades in households with lower income and durable good holdings and when children are more closely spaced behavior also differs as predicted between children from households that appear to be borrowing constrained and those that appear unconstrained copyright 1994 by mit press

business cycles indicators and forecasting acknowledgments introduction james h stock and mark w watson 1 twenty two years of the nber asa quarterly economic outlook surveys aspects and comparisons of forecasting performance victor zarnowitz and phillip braun comment allen sinai 2 a procedure for predicting recessions with leading indicators econometric issues and recent experience james h stock and mark w watson comment kenneth f wallis 3 estimating event probabilities from macroeconometric models using stochastic simulation ray c fair comment james d hamilton 4 a nine variable probabilistic macroeconomic forecasting model christopher a sims comment pierre perron 5 why does the paper bill spread predict real economic activity benjamin m friedman and kenneth n kuttner comment ben s bernanke 6 further evidence on business cycle duration dependence francis x diebold glenn d rudebusch and daniel e sichel comment bruce e hansen 7 dynamic index models for large cross sections danny quah and thomas j sargent comment john geweke 8 modelling non linearity over the business cycle clive w j granger timo terdsvirta and heather anderson comment andrew harvey contributors author index subject index

demographic structure and the political economy of education subsidies this paper investigates the politico economic impact of a society s age structure on the extent of public funding of education education subsidies serve to internalize positive spillovers of human capital investment but redistribute resources from the working old to the non working young thus creating a conflict of interest between the two generations the political process is characterized by a representative democracy

loafing or learning the demand for informal education abstract using detailed time use data for germany a positive correlation is found between the level of schooling and time investments in informal education two hypotheses explain this observation 1 highly educated people have higher opportunity costs of their leisure time and thus prefer leisure activities which add to their market productivity wage effect and 2 highly educated people have a preference for high quality leisure taste effect the demand for informal education is derived in a household production model accounting for both explanations an empirical investigation finds evidence for both effects with the taste effect being more important

estimating potential output as a latent variable this article proposes a new method for estimating potential output in which potential real gross domestic product gdp is modeled as an unobserved stochastic trend and deviations of gdp from potential affect inflation through an aggregate supply relationship the output and inflation equations together form a bivariate unobserved components model which is estimated via maximum likelihood through the use of the kalman filter algorithm the procedure yields a measure of potential output and its standard error and an estimate of the quantitative response of inflation to real growth and the output gap

are economic time series asymmetric over the business cycle it has long been argued that major cyclical variables such as the unemployment rate display an asymmetric behavior over various phases of the business cycle the paper provides a statistical test for this hypothesis using the framework of finite state markov processes i implement a test to see if the behavior of the unemployment rate is characterized by sudden jumps and slower drops it is argued that the framework provided in the paper can also be used to test other sample path properties of economic time series

time irreversibility and business cycle asymmetry the problem of business cycle symmetry is addressed within the context of time reversibility to this effect the authors introduce a time domain test of time reversibility the tr test in an application they show that time irreversibility is the rule rather than the exception for two well known representative macroeconomic data sets this shows that many components of the business cycle have asymmetric fluctuations the characterization of asymmetry provided by the tr test shows that many series exhibit steepness asymmetry a few series appear to be either deep or sharp copyright 1996 by ohio state university press

asymmetry in business fluctuations international evidence on friedman s plucking model abstract friedman s plucking model of business fluctuations suggests that output cannot exceed a ceiling level and it is occasionally plucked downward by recession output has depth and steepness this study uses a sample of 12 industrial and emerging economies and finds some evidence that negative shocks are largely transitory while positive shocks are mostly permanent in a few cases as implied by the plucking model output fluctuations tend to be asymmetric recessions are transitory and duration dependent although expansions are not there is however serial correlation in almost all cases international evidence on friedman s plucking model is far from robust

the plucking model of business fluctuations revisited the recent surge of renewed interest in business cycles in general and real business cycles in particular brought to mind a plucking model of business fluctuations that i suggested some twenty five years ago but that has since sunk into complete oblivion 1 i was led to the model in the course of investigating the direction of influence between money and income did the common cyclical fluctuations in money and income reflect primarily the influence of money on income or of income on money one of the five kinds of evidence that i examined was the serial correlation of amplitudes of cycle phases 2 as i wrote is the magnitude of an expansion related systematically to the magnitude of the succeeding contraction does a boom tend on the average to be followed by a large contraction p 271 to find out i calculated rank difference correlations between measures of the amplitudes of expansions and successive contractions in three different series for the period 1879 to 1961 the three series were rate of change of the stock of money a physical index of general business and clearing debits as an indicator of dollar value change in general business similarly i asked the same question except starting with a contraction in the given series and correlating its amplitude with the amplitude of the succeeding expansion 3 the results were striking for all three series the correlation was trivial between the amplitude of an expansion and the amplitude of the succeeding contraction on the other hand for both the rate of change of the money stock and the physical index of general business the correlation was high and statistically significant between the amplitude of a contraction and the amplitude of the succeeding expansion for clearing debits this correlation too was low i concluded there appears to be no systematic connection between the size of an expansion and of the succeeding contraction whether size is measured by physical volume or by dollar value pp 272 73 on the other hand a large contraction in output tends to be followed on the average by a large business expansion a mild contraction by a mild expansion p 273 though that is not so for the dollar value of the expansion and contraction i went on this phenomenon if it should be confirmed by a fuller analysis of data for the united states and other countries would have important implications for the analysis of business cycles in general not solely for our monetary studies for one thing it would cast grave doubt on those theories that see as the source of a deep depression the excesses of the prior expansion the mises cycle theory is a clear example 4 for another it would raise serious questions about both the analytical models in terms of which most of us have come to approach the analysis of cycles and the statistical methods we use to analyze them our analytical models generally involve a conception of a self generating cycle in which each phase gives rise to the next and which may be kept going by a sequence of random shocks each giving rise to a series of damped perturbations the corresponding physical analogy is of an electrical network in which responses are described by sine waves the asymmetric serial correlation patter suggests that this analogy may be misleading that a better one is what can be termed a plucking model consider an elastic string stretched taut between two points on the underside of a rigid horizontal board and glued lightly to the board let the string be plucked at a number of points chosen more or less at random with a force that varies at random and then held down at the lowest point reached the result will be to produce a succession of apparent cycles in the string whose amplitudes depend on the force used in plucking the string the cycles are symmetrical about their troughs each contraction is of the same amplitude as the succeeding expansion

the hamilton model with a general autoregressive component estimation and comparison with other models of economic time series abstract this paper generalizes the hamilton model to the important case in which the autoregressive component need not contain a unit root using u s quarterly real gnp data the model is estimated and the results are compared to those of hamilton some monte carlo evidence for the model is presented and its in sample forecasting performance is discussed and compared to the original hamilton model the arima model and the deterministic time trend model

are deep recessions followed by strong recoveries abstract we examine the hypothesis that deep recessions are followed by strong recoveries using a monthly data set for industrial production covering the period 1884 1990 there is a statistically significant relationship between growth in the first twelve months of a recovery and the peak to trough decline in industrial activity this effect is still found when we exclude the great depression from our sample we find no evidence that the length of the recession affects the strength of the subsequent recovery

direct and indirect effects of parental education level on the demand for higher education this paper investigates empirically the impact of parental education level family income scholastic ability and expectations on earnings and employment on the demand for higher education in the netherlands in theory the factors mentioned are important determinants of educational choice the wald or distance test is used to discriminate between direct and indirect effects of the parental education level and other background variables on the demand for higher education we find that family income ability and expectations have a direct effect on earnings and employment while the parental education level exerts indirect effects only

the demand for education under capital market imperfections this paper studies the theoretical implications of the demand for education assuming the same regime for financing consumption and the direct costs of education when the capital market is not perfect it is motivated by the policy concerns on the financing of post secondary education in case of an imperfect capital market the separation theorem see e g wallace and ihnen 1975 is not valid and the theoretical implications substantially deviate from their counterparts under a perfect capital market regime for example in a capital market with credit rationing the borrowing rate exerts a positive effect on the demand for education whereas this effect is negative in case of a perfect capital market the theoretical results are used to discuss the effects of government policy on the demand for post compulsory education

are deep recessions followed by strong recoveries results for the g 7 countries the hypothesis is examined that the severity of a recession favourably affects the rate of growth of output during the period immediately after the recession our empirical analysis is based on the behaviour of industrial output in the g 7 countries during the period 1960 to 1985 the depth of a recession defined as the cumulative output loss between the peak and trough dates is shown to be negatively correlated with growth in the first 12 months of the subsequent expansion

the cyclical component of u s economic activity quarterly data on industrial production and deflated gross national product in the united states from 1947 through 1985 are decomposed into independent nonstationary trend and stationary cycle components using kalman filtering and smoothing techniques estimates of the model parameters imply that at least half of the quarterly innovation in u s economic activity can be attributed to a stationary cyclical component that persists over periods of time as long as five years this finding is inconsistent with the hypothesis that most of the apparent variation in u s economic activity can be attributed to a nonstationary trend component

nonlinearity and the permanent effects of recessions this paper presents a new nonlinear time series model that captures a post recession bounce back in the level of aggregate output while a number of studies have examined this type of business cycle asymmetry using recession based dummy variables and threshold models we relate the bounce back effect to an endogenously estimated unobservable markov switching state variable when the model is applied to us real gdp we find that the markov switching regimes are closely related to nber dated recessions and expansions also the markov switching form of nonlinearity is statistically significant and the bounce back effect is large implying that the permanent effects of recessions are small meanwhile having accounted for the bounce back effect we find little or no remaining serial correlation in the data suggesting that our model is sufficient to capture the defining features of us business cycle dynamics when the model is applied to other countries we find larger permanent effects of recessions copyright 2005 john wiley sons ltd

business cycle asymmetry a deeper look this paper distinguishes two types of asymmetry in business cycles deepness and steepness deepness is defined as the characteristic that troughs are further below trend than peaks are above most previous research has focused exclusively on steepness which refers to cycles in which contractions are steeper than expansions a test for deepness is proposed and applied to u s post war quarterly unemployment real gnp and industrial production evidence of deepness is found for unemployment and industrial production while the evidence for real gnp is weaker previous evidence of steepness in unemployment is confirmed

international evidence on friedman s theory of the business cycle i introduction milton friedman 1969 1993 discusses two empirical business cycle regularities he finds in u s data and conjectures that they may exist in other countries data first friedman argues that u s data on real output show an important ceiling effect growth rates are on average below the ceiling rate but tend back to the ceiling rate second he finds an asymmetry in business cycles the size of a contraction importantly influences the size of the following expansion with major expansions tending to follow major contractions the size of an expansion however has no stable relationship to the size of the following contraction friedman offers theoretical reasons for the existence of these regularities the ceiling effect arises from aggregate supply constraints on the level of real output as for asymmetry aggregate demand disturbances primarily from monetary shocks in friedman s view can reduce output below the ceiling but the economy s equilibrating forces and possibly expansionary monetary policy in reaction to the recession push the economy back to the ceiling with the size of an expansion thus related to the size of the preceding contraction the next contractionary aggregate demand disturbance is unrelated in friedman s view to the size of the previous expansion meaning that the size of a contraction is unrelated to the size of the preceding expansion both the regularities and his theoretical discussion have important implications for business cycle analysis the empirical asymmetry friedman suggests joins other asymmetries discussed in recent literature for example hamilton 1989 neftci 1984 sichel 1993 this paper follows friedman s 1993 suggestion to examine whether foreign data show the regularities he finds in u s data friedman s model includes regime shifts at times the economy is on the potential output ceiling where aggregate supply determines the evolution of the economy at other times aggregate demand disturbances force the economy below the ceiling with movements below the ceiling determined by aggregate demand such regime shifting models are inherently nonlinear in important ways and pose serious challenges both for theoretical and empirical models for example in calibrating real business cycle models it would be important to be able to generate friedman s ceiling and asymmetry effects if in fact the data support these real business cycle models with continuous market clearing would then have to have a mechanism that does not rely as does friedman s on sluggish price adjustment and deviations of output from its equilibrium level further those keynesian macroeconometric models where output is essentially demand determined must somehow generate friedman s ceiling and asymmetry effects if the ceiling and asymmetry effects that friedman finds in u s data hold up across countries their importance lies in the restrictions they impose on what is likely to be observed in the future and what patterns business models must be able to generate the effects hold little promise of allowing discrimination among classes of models friedman s plucking model is a ceiling model like john hicks s 1950 model of the trade cycle it is possible to construct keynesian type ceiling models where disturbances to consumption and investment demand cause contractions with the size of the following expansion depending on the size of the contraction and the size of these demand disturbances uncorrelated across cycles it is also possible to construct monetarist models where the monetary authority s expansionary errors are correlated with its following contractionary errors with the size of an expansion then having predictive power about the size of the next contraction thus ceiling and asymmetry regularities do not allow discrimination between keynesian and monetarist ceiling models friedman s 1993 views contrast strongly with the real business cycle models of the past decade as in long and plosser 1983 and king plosser and rebelo 1988 among many the regularities friedman finds conflict with simple real business cycle models but we conjecture that if the regularities hold across countries real business cycle models could be constructed that produced data on real output with these regularities

the cleansing effect of recessions the authors investigate industry response to cyclical variations in demand production units that embody the newest process and product innovations are continuously being created and outdated units are being destroyed although outdated units are the most likely to turn unprofitable and be scrapped in a recession they can be insulated from the fall in demand by a reduction in creation the structure of adjustment costs plays a determinant role in the responsiveness of those two margins the calibrated model matches the relative volatilities of the observed manufacturing job creation and destruction series and their asymmetries over the cycle copyright 1994 by american economic association