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Essays in business cycle economics

University of British Columbia

This thesis contains three distinct chapters that contribute to our understanding of the causes and consequences of business cycles. Modern business-cycle models generally feature several different random shock processes that drive business cycles. Being able to reliably evaluate the individual importance of any one these shocks depends importantly on having accurate estimates of the variances of the shocks. In the first chapter, it is shown that when a model is a poor approximation to the data, typical variance estimates are biased upward. A simple procedure to identify and partially correct for these effects is proposed. Applying this procedure to a recent paper from the literature reduces the estimated variances by as much as a third of their respective naive estimates. The second chapter explores a view of recessions (typically associated with Friedrich Hayek) whereby, after a period of rapid accumulation of houses, consumer durables and business capital, the economy goes through a period of needed liquidation that results in a decline in economic activity. An alternative (typically associated with Keynes) that is often contrasted with this liquidation view is that recessions are times of deficient demand. These two views have opposite implications for fiscal policy: in the first, fiscal policy simply prolongs the needed adjustment, while in the second fiscal policy can prop up demand. This chapter argues that the two views may be more closely linked than previously recognized, in that liquidations can produce periods where the economy is characterized by deficient demand. The final chapter presents a model in which business-cycle booms and busts are inherently related, whereby a boom causes a subsequent bust, which in turn leads to another boom, and so on. In particular, it is shown how a purely deterministic model can produce fluctuations that persist indefinitely. These cycles exactly repeat themselves, while in the data business cycles are somewhat irregular. It is shown that by adding a small amount of random variation to the model, it is capable of replicating business cycle features in the data well, including their irregularity.

Text

2015-06-10

Attribution-NonCommercial-NoDerivs 2.5 Canada

http://hdl.handle.net/2429/53888

Economics

University of British Columbia

UBCV

http://creativecommons.org/licenses/by-nc-nd/2.5/ca/