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Do Institutions and Culture Matter for Business Cycles?

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Abstract

We examine the relationship between cyclical fluctuations and macroeconomic, institutional, and cultural indicators for 46 countries from Europe and the Mediterranean basin. In the Mediterranean cycles are different: the duration of expansions is shorter; the amplitude of recessions is larger; and cyclical synchronization is smaller than elsewhere. Differences in cultural indicators have strong and significant associations with differences in the persistence and volatility of cyclical fluctuations and their synchronization.

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Notes

  1. “Spain’s Jobless Rely on the Family, A Frail Crutch,”by Suzanne Daley, July 28, 2012.

  2. For robustness we have also calculated the turning points using per-capita GDP data where available - see Table A.2 in the Online Appendix: Do Institutions and Culture Matter for Business Cycles? (http://home.ku.edu.tr/~saltug/OnlineResources/onlineapp.pdf). We stick to our initial classification because with per-capita data many countries fail to display at least one complete cycle and the business cycle phases that are generated are counterfactual - for example, recessions tend to last longer than expansions.

  3. However, these data are not available for every country for each year of the sample. Hence, we compute the measure of bilateral trade linkages between country i and j reported in the text for the years in which these data are available, and then take an average across the years.

  4. Because in our sample only Algeria and Russia are major oil/gas producers, the Dutch disease-type effects deriving from changes in commodity prices are minor in our sample and we do not control for them in the analysis.

  5. There is evidence that countries that are more dissimilar in their individualistic traits tend to experience contractions that are closer in length, suggesting that there is not a uniform association between the business cycle characteristics and the different traits.

  6. We also find that larger differences in the importance attached to the family across the lead to greater business cycle synchronization in both the full sample and the Mediterranean sample. This finding may reflect the nature of business cycle synchronization for the Mediterranean countries, which tend to exhibit greater co-movement with countries outside of their group than amongst each other.

  7. Guiso et al. (2013) argue that policy-makers in countries which are differentiated in terms of their culture may face a “conformity constraint”, which makes its difficult for them to adopt policies that violate the cultural norms in their societies. They use this framework to rationalize the poor management of the Greek crisis in the context of EU-wide decision-making.

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Acknowledgments

We would like to thank Benjamin Born, Tullio Jappelli, Marco Manacorda, Evi Pappa, Johannes Spinnewijn, Matteo Ciccarelli and the participants of seminars at the University of Cyprus, CRETE 2012, the 56’th Economic Policy Panel Meeting, and Konstanz Monetary Conference, 2013 for comments and suggestions. Part of the work was conducted while Canova was also associated with ICREA-UPF, the Barcelona GSE and the CREMED. Canova acknowledges the financial support of the CREMED, the Barcelona GSE and the Spanish Ministry of Science and Technology (grant ECO2009-08556).

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Authors and Affiliations

  1. Koç University and CEPR, Istanbul, Turkey

    Sumru Altug

  2. EUI and CEPR, Firenze, Italy

    Fabio Canova

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  1. Sumru Altug
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  2. Fabio Canova
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Correspondence to Sumru Altug.

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Altug, S., Canova, F. Do Institutions and Culture Matter for Business Cycles?. Open Econ Rev 25, 93–122 (2014). https://doi.org/10.1007/s11079-013-9298-0

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