Stylized Facts of the Business Cycle: Universal Phenomenon, or Institutionally Determined?

Abstract

This paper empirically investigates and theoretically reflects on the generality of some “stylized facts” of business cycles. Using data for 1960–2016 and a sample of OECD countries, the duration of business cycles as well as three models capturing core macroeconomic relations are estimated: the Phillips curve (the inflation-unemployment nexus), Okun’s law (i.e. the relation between output growth and unemployment) and the inflation-output relation. Results are validated by relevant statistical tests. Observed durations vary from 4.2 to 7.4 years, and estimated coefficients differ in signs and magnitudes. An explanation of this heterogeneity is attempted by referring to proxies for various institutional variables. The findings suggest that core coefficients in the relations, such as the slope of the Phillips curve, show significant correlation with some of these variables, but no uniform results are obtained. In the detailed theoretical discussion and interpretation it is thus argued that the notable differences between countries call the universality of the “stylized facts” into question, but also that these variations cannot be explained exhaustively by the institutional proxy variables employed here.

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Fig. 1

Source Own illustration, based on the HP filtered data of real GDP per capita, 1960–2016

Notes

  1. 1.

    For the U.S., this is clearly documented in NBER data. Further see Zarnowitz (1992, 22 f.), Bergman et al. (1998) and Romer (2008), also Baxter and King (1999).

  2. 2.

    First we test for heteroscedasticity and apply the robust errors only if the tests suggests heteroscedasticity on the 5% level. Robust errors do not alter the coefficients of interest; however, the significance level may change.

  3. 3.

    A 5% benchmark for the autocorrelation test is used and the autocorrelation consistent errors are applied only where necessary. As in the case of robust errors, the coefficients remain the same.

  4. 4.

    The VAR approach in context of business cycle theory is extensively discussed by Stock and Watson (2016).

  5. 5.

    The specifications contain from one to three lags according to parsimony and with consideration of the autocorrelation and normality tests for the residuals.

  6. 6.

    Setting signal dimensions higher than two does not significantly shift the estimated value of the dominant frequency and merely creates additional humps in the pseudo-spectrum up to the fourth signal dimension.

  7. 7.

    The estimates for the four models of interest are validated with tests for autocorrelation and heteroscedasticity.

  8. 8.

    Parametric methods are preferred if the data are normally distributed. Otherwise, one should consider non-parametric estimates. In this paper, normality is checked for with the test as in Shapiro and Wilk (1965). According to the test, the institutional proxies are not normally distributed and therefore non-parametric methods are appropriate.

  9. 9.

    The countries were selected according to the availability of especially the institutional data and bearing in mind the time frames.

  10. 10.

    For example, it is also worth noting in this context that the estimates of total business cycle duration used in the similar analysis of Altug et al. (2012, 350) are considerably longer at around 8 years on average. Despite the different sample and time period covered, this may be an instructive observation because the method Altug et al. (2012, 349 f.) used to determine the duration is different once again, namely based on an identification of peaks and troughs of fluctuations.

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Acknowledgements

The authors would like to express their gratitude to Harald Hagemann, Martyna Marczak, Klaus Prettner and Johannes Schwarzer for their support during the work on the given paper and beyond. In addition, the authors are thankful to Michael Graff and the anonymous referees for their suggestions and comments.

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Correspondence to Vadim Kufenko.

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Kufenko, V., Geiger, N. Stylized Facts of the Business Cycle: Universal Phenomenon, or Institutionally Determined?. J Bus Cycle Res 13, 165–187 (2017). https://doi.org/10.1007/s41549-017-0018-5

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Keywords

  • Business cycles
  • Empirical analysis
  • Institutions
  • Stylized facts

JEL Classification

  • E02
  • E32
  • E39
  • F44