THE MONTE CARLO CYCLE IN BUSINESS ACTIVITY

NBER business"cycle" reference dates and aggregate economic time series are examined for evidence of regular cyclic behavior. A simple contingency table test is used on the reference dates, and aggregate series are fit with a second-order autoregression. The results are negative. Apparently the business "cycle" is an optical illusion or, as Irving Fisher called it, a "Monte Carlo cycle." These are the cycles superstitious gamblers believe govern their luck.     

IDENTIFYING THE ROLE OF RISK SHOCKS IN THE BUSINESS CYCLE USING STOCK PRICE DATA

I analyze the sources of U.S. business cycle fluctuations in an estimated Dynamic Stochastic General Equilibrium model with a rich set of nominal and real rigidities and various exogenous disturbances. The model includes a shock to the expected risk‐premium, which introduces a time‐varying wedge between the policy rate set by the central bank and the cost‐of‐capital of firms. In the aggregate data, most U.S. corporations finance their investment using internal funds, and stock prices reveal the opportunity cost of this type of financing. I therefore use corporate market value and dividend data in the Bayesian estimation of the model to identify risk shocks. Variance decomposition exercises show that these shocks account for a substantial part of the variation in the stock market, as well as the variation in output and investment, especially at short forecast horizons. The variation of these variables at longer forecast horizons are mainly captured by shocks to investment‐specific technological change. Historical decomposition points to the important role played by risk shocks in the run up of stock prices and output in the late 90s, and in the reversal of these variables in the early 2000s and during the recent recession. (JEL E32, E44)     

MOONLIGHTING OVER THE BUSINESS CYCLE

Using data from the 1979 National Longitudinal Survey of Youth, we examine the cyclicality of moonlighting by gender. We estimate a random-effects Tobit model of moonlighting among working men and women and find that while male moonlighting behavior does not fluctuate significantly with the business cycle, female moonlighting does. The cyclicality of female moonlighting has, nonetheless, varied over the course of the past 35 yr. Female moonlighting seemed to behave countercyclically during much of the 1980s and early 1990s, confirming the popular media belief that moonlighting is more likely to occur during periods of economic distress. Yet, this countercyclical behavior disappears during the 1993–1999 period to become procyclical by the early twentieth century. The recent procyclicality of female moonlighting supports the idea that female workers respond to a need for "just-in-time" employment following the economic upturn of the mid- to late 1990s. ( JEL J2, E32)     

POLITICAL MODELS OF THE BUSINESS CYCLE SHOULD BE REVIVED

Political models of the business cycle have typically been ignored because they appear inconsistent with rational behavior and because empirical evidence is inconclusive. This paper addresses the second issue, demonstrating for U.S. real GNP, unemployment, and inflation that electoral cycles (persistent patterns across electoral terms) are significant, but apparently only for Republican incumbents, and that partisan cycles (persistent differences between parties) are also significant. These findings are consistent with the conjecture that a minority party is more constrained by electoral concerns, whereas a majority party is freer to pursue partisan objectives.     

INTERNATIONAL EVIDENCE ON FRIEDMAN'S THEORY OF THE BUSINESS CYCLE

Milton Friedman's theory of the business cycle implies two empirical regularities tested for here. One regularity is that business cycles are asymmetric: The size of a contraction affects the size of the following expansion, but not vice versa. The second regularity is that a supply-side ceiling to aggregate output limits the size of expansions. Friedman's correlation methods yield only very weak support for the asymmetry hypothesis when applied to real GNP data of eight OECD countries. A time series model with a ceiling component fits the data well for a majority of the countries.     

FURTHER EVIDENCE ON THE MONTE CARLO CYCLE IN BUSINESS ACTIVITY

This paper tests the null hypothesis that "cycles" in business activity are merely Monte Carlo cycles. It compares the actual distribution of expansionary and contractionary phase duration times with those which would be expected under the null hypothesis. If the probability of a phase turning point is constant during a small interval of time, rather than increasing, the duration times of upswings and downswings should be exponentially distributed. Goodness of fit statistics were calculated for each phase for the post World War II time series of: five coincident indicators, inverted unemployment rate, and production index. The evidence found here supports the Monte Carlo thesis.     

CATASTROPHE THEORY AND THE BUSINESS CYCLE

We use the approach of R. Thom's "Catastrophe Theory" to construct a generalization of Kaldor's 1940 trade cycle. The model allows for cyclic behavior which exhibits either rapid recoveries (recessions) or slow recoveries (depressions) .     

BUSINESS CYCLE FLUCTUATIONS WITH THE DIVISION OF PERMANENT AND TEMPORARY EMPLOYMENT

In the mainstream real business cycle (RBC) model, labor can be viewed as temporary employment since the firm's demand for labor behaves directly in response to stochastic productivity shocks in each period. This paper provides a tractable way of analyzing fluctuations in permanent and temporary employment over the business cycle, as well as the underlying driving forces. This inclusion of heterogeneity helps reconcile the RBC model with the U.S. data given that temporary employees in general only account for a small proportion of total private‐sector employment (about 2%–3%). We draw an explicit division between permanent and temporary employment and resort to this separation to account for stylized facts that characterize a two‐tier labor market. In particular, with regard to the U.S. labor market, our benchmark model can well explain the motivating facts: (1) temporary employment is much more volatile than permanent employment, (2) the share of temporary employment (the ratio of temporary to aggregate employment) exhibits strong pro‐cyclicality, (3) permanent employment lags by two quarters on average, and (4) the correlation between temporary employment and output is stronger than that involving the permanent counterpart. The quantitative analysis suggests that our proposed channels explain the main facts well and the model further provides plausible reasoning for a firm's labor hoarding. (JEL E24, E32)     

LOGROLLING IN THE U.S. CONGRESS

Does exchange, i.e., vote trading, occur in legislatures?!f so, is it quantitatively important or optimal? How important are political parties for the organization of logrolling coalitions? To address these questions, this paper investigates a broad range of votes where logrolling has been reported among interests favoring subsidies for urban, labor, and farm interests. The findings suggest that logrolling agreements are widespread, that many Democratic congressmen changed votes because of logrolling agreements, and that the Democratic party served to facilitate logrolling between its members. Furthermore, logrolling coalitions exhibited a strong degree if stability.     

THE BEHAVIOR OF REGULATORY ACTIVITY OVER THE BUSINESS CYCLE: AN EMPIRICAL TEST

This paper tests a prediction of the interest-group theory of regulation which suggests that regulators generally will not force any one group to bear the full adjustment costs associated with variations in the business cycle. That is, the interest-group model predicts that regulatory agencies will redistribute cyclical gains and losses by supplying more "producer protection" regulation during contractions and more "consumer protection" regulation during expansions; i.e., regulatory activity which reduces consumer welfare will tend to be countercyclical, intensifying when aggregate demand falls and abating as demand increases.
The empirical results show a countercyclical and statistically significant ceteris paribus relationship between Federal Trade Commission enforcement efforts under the Robinson-Patman Act and several alternative measures of general business conditions. Since the Robinson-Patman Act is viewed widely as anti-consumer, the findings suggest that in cyclical downturns the Commission moves to protect producers against losses by bringing more cases which limit the tendency for prices to fall. This result may be rationalized under the view that during recessions, the Federal Trade Commission is in the business of transferring wealth from consumers either to protect small business or to bolster cartels. On the other hand, during business expansions the Commission reduces its Robinson-Patman case load, and such a change in enforcement may serve to mitigate producer gains, transferring wealth to consumers at the margin. In any case the paper offers empirical support for the interest-group model by providing evidence that the business cycle plays an important part in explaining the level and pattern of regulatory activity.     

RECESSIONS AND RECOVERIES IN REAL BUSINESS CYCLE MODELS

We evaluate the ability of a simple real business cycle model to generate business cycles in the classical NBER sense of the term, where recessions are periods of absolute declines in economic activity. We use the "phase" classification of Burns and Mitchell [1946] to determine the "shape" of the business cycle and to look for asymmetries between expansions and contractions. We show that such a model can generate business cycles of plausible duration and depth, but cannot match the actual "Shape" of the business cycle. Nonlinear models, such as Friedman's [1993] "plucking" model may more closely match the observed shape.     

TRENDS IN RANKINGS OF ECONOMICS DEPARTMENTS IN THE U.S.: AN UPDATE

Economics departments in the U.S. are ranked based on (1) the number of pages published in thirty-six economics journals, (2) publications in five of the top journals, (3) output per faculty member, and (4) an index of the concentration of research in a department. Evidence shows that the top twenty departments have generally retained their positions since the 1970s, but rather large changes have occurred in departments ranked from 240 to 100. An "Economists Hall of Fame" is developed listing the top fifty individual producers of research in the thirty-six journal set and the top five journals.     

THE IMPACT OF A PUBLIC OPTION IN THE U.S. HEALTH INSURANCE MARKET

We develop a game‐theoretical framework to examine the implications of the introduction of a nonprofit “public option” in the U.S. health insurance market. In this model, heterogeneous consumers have to choose between two competing insurance plans. One plan is offered by a profit‐maximizing private insurer; the other by social‐welfare‐maximizing public option. In equilibrium, the distinct objectives of the two insurers induce adverse selection in consumer choice: the public option covers the less healthy consumers, yielding the more profitable segment of market to the private insurer. However, our empirical results suggest that both insurers will capture significant parts of the health insurance market. (JEL I11, L10, L21, L32)     

THE DEVELOPMENT OF CONTINUOUS CASTING IN THE U. S. STEEL INDUSTRY: COMMENT

In a recent article, Professor Ault has stated that:
studies of the steel industry during the fifties and early sixties have indicated that the major cause of the deterioration of the ability of the U.S. industry to compete was the failure of increases in the productivity of US. steel workers to keep pace with increases in the wages and benefits paid to those workers. One of the principal causes for this lag in productivity was the failure of major U.S. producers to adopt the Basic Oxygen Furnace as rapidly as major foreign producers…despite the fact that the Oxygen converter proved to be capable of producing basic steel products at lower unit cost than any other production technique.     

STABILITY AND CHANGE IN THE U.S. PUBLIC'S KNOWLEDGE OF POLITICS

The U.S. public's current knowledge about politics is comparedwith levels of knowlege in the 1940s and 1950s. Fourteen questionsasked by Gallup on various surveys from 1945 to 1957 were includedon a larger survey of political knowledge conducted by telephonein 1989 with a randomly selected sample of 610 adult U.S. residents.On 8 of the 14 items, the percentage answering correctly in1989 was higher than in the earlier surveys (by 4–15 points).One item showed an increase of 1 percent, two were down 1 percent,and three others declined by 5 percent, 9 percent, and 10 percent.When level of education is controlled, however, levels of knowledgeappear to have declined for most of the items. A reanalysisof some of the original Gallup data is used to estimate theeffectiveness of schools in transmitting political informationin 1989 compared with the earlier years.     

U.S. MONEY DEMAND: STRUCTURAL SHIFTS OR HETEROGENEOUS AGENTS?

This paper examines whether observed "structural shifts" in the money demand function could be the result of agent heterogeneity due to different household income levels. Following the methodology of Stoker [1986], income distribution variables are found to be significant determinants of money demand, and once changes in the distribution of income are accounted for, there is no evidence of parameter instability. A money demand function incorporating income distribution effects is shown to perform as well or better than several standard alternatives on the basis of diagnostic tests, non-nested hypothesis tests, within-sample prediction errors and out-of-sample forecasting.     

NONLINEAR BUSINESS CYCLE DYNAMICS: CROSS-COUNTRY EVIDENCE ON THE PERSISTENCE OF AGGREGATE SHOCKS

We look for asymmetries in the dynamics of real GDP growth for the G7 countries, using a model by Beaudry and Koop that allows the depth of a recession to influence the rate of growth of output. We find evidence supporting these nonlinearities in four countries, including the United States, but we do not find evidence that the asymmetries are common even among the four countries exhibiting asymmetric behavior. A modification of the model to distinguish between the recession and recovery phases of a business cycle does not change this general finding. The asymmetries discovered by Beaudry and Koop do not appear to be common among the G7 nations. (JEL E32)