Evidence and Ideology in Macroeconomics: The Case of Investment Cycles

The paper reports the principal findings of a long term research project on the description and explanation of business cycles. The research strongly confirmed the older view that business cycles have large systematic components that take the form of investment cycles. These quasi-periodic movements can be represented as low order, stochastic, dynamic processes with complex eigenvalues. Specifically, there is a fixed investment cycle of about 8 years and an inventory cycle of about 4 years. Maximum entropy spectral analysis was employed for the description of the cycles and continuous time econometrics for the explanatory models. The central explanatory mechanism is the second order accelerator, which incorporates adjustment costs both in relation to the capital stock and the rate of investment. By means of parametric resonance it was possible to show, both theoretically and empirically how cycles aggregate from the micro to the macro level. The same mathematical tool was also used to explain the international convergence of cycles. I argue that the theory of investment cycles was abandoned for ideological, not for evidential reasons. Methodological issues are also discussed

Business cycles, international trade and capital flows: Evidence from Latin America

This paper adopts a flexible framework to assess both short- and long-run business cycle linkages between six Latin American (LA) countries and the four largest economies in the world (namely the US, the Euro area, Japan and China) over the period 1980:I-2011:IV. The result indicate that within the LA region there are considerable differences between countries, success stories coexisting with extremely vulnerable economies. They also show that the LA region as a whole is largely dependent on external developments, especially in the years after the great recession of 2008 and 2009. The trade channel appears to be the most important source of business cycle comovement, whilst capital flows are found to have a limited role, especially in the very short run

Fiscal shocks and real exchange rate dynamics: Some evidence for Latin America

This paper analyses the effects of fiscal shocks using a two-country macroeconomic model for output, labour input, government spending and relative prices which provides the orthogonality restrictions for obtaining the structural shocks. Dynamic simulation techniques are then applied, in particular to shed light on the possible effects of fiscal imbalances on the real exchange rate in the case of six Latin American countries. Using quarterly data over the period 1980-2006, we find that in a majority of cases fiscal shocks are the main driving force of real exchange rate fluctuations

Capacity utilization dynamics and market power

In an intertemporal general equilibrium model with imperfect competition, we settle a relationship between factor utilization and markups, via the effect of capacity utilization rate changes on firms' market power when the demand for goods is uncertain. When competition is imperfect, the existence of capacity constraints introduces a distinction between demand and sales price elasticities. At given demand price elasticity, the price elasticity of sales will be smaller the larger the aggregate capacity utilization rateo In such a framework, capacity utilization aifects the propagation mechanism of exogenous disturbances in two ways. The first effect is similar to the effect that bottlenecks and stockouts would have in a perfectly competitive setup; the second effect is related to imperfect competition and works through market power and optimal markup changes. We study these interactions and their implications for the dynamic behavior of sorne key macro variables in response to various "structural" changes. We show that the same shock can have quite different short run effects depending on the characteristics of the initial stationary state (low or high capacity utilization rate)

Evidence and Ideology in Macroeconomics: The Case of Investment Cycles

The paper reports the principal findings of a long term research project on the description and explanation of business cycles. The research strongly confirmed the older view that business cycles have large systematic components that take the form of investment cycles. These quasi-periodic movements can be represented as low order, stochastic, dynamic processes with complex eigenvalues. Specifically, there is a fixed investment cycle of about 8 years and an inventory cycle of about 4 years. Maximum entropy spectral analysis was employed for the description of the cycles and continuous time econometrics for the explanatory models. The central explanatory mechanism is the second order accelerator, which incorporates adjustment costs both in relation to the capital stock and the rate of investment. By means of parametric resonance it was possible to show, both theoretically and empirically how cycles aggregate from the micro to the macro level. The same mathematical tool was also used to explain the international convergence of cycles. I argue that the theory of investment cycles was abandoned for ideological, not for evidential reasons. Methodological issues are also discussed.business cycle; continuous time econometrics; investment cycle; inventory cycle; maximum entropy spectral analysis; parametric resonance

The sources and nature of long-term memory in the business cycle

This paper examines the stochastic properties of aggregate macroeconomic time series from the standpoint of fractionally integrated models, focusing on the persistence of economic shocks. We develop a simple macroeconomic model that exhibits long-range dependence, a consequence of aggregation in the presence of real business cycles. We then derive the relation between properties of fractionally integrated macroeconomic time series and those of microeconomic data and discuss how fiscal policy may alter the stochastic behavior of the former. To implement these results empirically, we employ a test for fractionally integrated time series based on the Hurst-Mandelbrot rescaled range. This test, which is robust to short-term dependence, is applied to quarterly and annual real GNP to determine the sources and nature of long-term dependence in the business cycle..Business cycles ; Time-series analysis

Business fluctuations in a behavioral switching model: Gridlock effects and credit crunch phenomena in financial networks

In this paper we characterize the evolution over time of a credit network in the most general terms as a system of interacting banks and firms operating in a three-sector economy with goods, credit and interbank market. Credit connections change over time via an evolving fitness measure depending from lenders’ supply of liquidity and borrowers’ demand of credit. Moreover, an endogenous learning mechanism allows agents to switch between a loyal or a shopping-around strategy according to their degree of satisfaction. The crucial question we investigate is how financial bubbles and credit-crunch phenomena emerge from the implemented mechanism