5 research outputs found
Power Law Distribution of the Duration and Magnitude of Recessions in Capitalist Economies : Breakdown of Scaling
Power law distributions of macroscopic observables are ubiquitous in both the
natural and social sciences. They are indicative of correlated, cooperative
phenomena between groups of interacting agents at the microscopic level. In
this paper we argue that when one is considering aggregate macroeconomic data
(annual growth rates in real per capita GDP in the seventeen leading capitalist
economies from 1870 through to 1994) the magnitude and duration of recessions
over the business cycle do indeed follow power law like behaviour for a
significant proportion of the data (demonstrating the existence of cooperative
phenomena amongst economic agents). Crucially, however, there are systematic
deviations from this behaviour when one considers the frequency of occurrence
of large recessions. Under these circumstances the power law scaling breaks
down. It is argued that it is the adaptive behaviour of the agents (their
ability to recognise the changing economic environment) which modifies their
cooperative behaviour.Comment: 17 pages, 6 figures, Accepted for Publication in Physica
Random Matrix Theory and the Failure of Macroeconomic Forecasts
By scientific standards, the accuracy of short-term economic forecasts has
been poor, and shows no sign of improving over time. We form a delay matrix of
time-series data on the overall rate of growth of the economy, with lags
spanning the period over which any regularity of behaviour is postulated by
economists to exist. We use methods of random matrix theory to analyse the
correlation matrix of the delay matrix. This is done for annual data from 1871
to 1994 for 17 economies, and for post-war quarterly data for the US and the
UK. The properties of the eigenvalues and eigenvectors of these correlation
matrices are similar, though not identical, to those implied by random matrix
theory. This suggests that the genuine information content in economic growth
data is low, and so forecasting failure arises from inherent properties of the
data.Comment: 15 Pages, 2 Figure
The Convergence of European Business Cycles 1978-2000
The degree of convergence of the business cycles of the economies of the
European Union is a key policy issue. In particular, a substantial degree of
convergence is needed if the European Central Bank is to be capable of setting
a monetary policy which is appropriate to the stage of the cycle of the Euro
zone economies.
We consider the annual rates of real GDP growth on a quarterly basis in the
large core economies of the EU (France, Germany and Italy, plus the
Netherlands) over the period 1978Q1 - 2000Q3. An important empirical question
is the degree to which the correlations between these growth rates contain true
information rather than noise. The technique of random matrix theory is able to
answer this question, and has been recently applied successfully in the physics
journals to financial markets data.
We find that the correlations between the growth rates of the core EU
economies contain substantial amounts of true information, and exhibit
considerable stability over time. Even in the late 1970s and early 1980s, these
economies moved together closely over the course of the business cycle. There
was a slight loosening at the time of German re-unification, but the economies
are now, if anything, even more closely correlated.
In contrast, the results obtained with a data set of the EU core plus the UK
show no such trend. In the late 1970s and early 1980s, the UK economy did
exhibit some degree of correlation with those of the core EU. However, there is
no clear evidence to suggest that the UK business cycle has moved more closely
into line with that of the core EU economies over the 1978-2000 period.Comment: 22 page