Narrow Results

This paper examines the cyclicality of remittance inflows to economies in Asia and the Pacific, aiming to identify major factors associated with remittances using gravity models of bilateral remittances. An analysis that assesses correlation coefficients between the cyclical factors of remittances and gross domestic product suggests that remittances tend to be countercyclical, or acyclical, against the business cycle of the remittance-receiving economy relative to the sending economy. This observation is confirmed by the gravity models of bilateral remittances. Furthermore, the estimation results suggest that migrant stock is one of the most significant factors affecting bilateral remittances. The study also shows that an increase in bilateral remittances can be attributed to a higher occurrence of disasters triggered by natural hazards in receiving economies, an appreciation of the receiving economy’s currency value against the sending economy’s, a lower interest rate differential (receiver–sender), greater capital account openness, more political instability, and lower costs of remittances.

This paper explains how indeterminacy in a one-sector model may arise due to externalities in the disutility of labor supply, which is termed as demand-side indeterminacy. This contrasts supply-side indeterminacy that is driven by externalities in the production function as exemplified by Benhabib and Farmer (Journal of Economic Theory, 1994). For the one-sector models considered, I find that indeterminacy arises more easily from the demand than from the supply side. In addition, demand and supply-side indeterminacy generate different cyclical patterns of wages, a feature that is useful for identifying episodes of self-fulfilling prophecies within the two types of indeterminacy.

The current general wisdom regarding fiscal policy in response to fluctuations in economic cycles is to adopt countercyclical strategies: contractive during a boom to avoid overheating the economy and expansive during a recession to stimulate economic activity. This paper attempts to investigate the practical behavior of fiscal policy in Indonesia in response to economic cycles to establish whether it follows general fiscal wisdom (countercyclical) or amplifies the cycle (procyclical). An error correction model (ECM) and an alternative model to deal with the possible endogeneity problem are utilized. This paper shows that fiscal policy in Indonesia tends to be procyclical. Observations of some other ASEAN countries, namely Malaysia, the Philippines, Singapore and Thailand, indicate that Singapore could be the only country in ASEAN that is able to implement a countercyclical fiscal policy.

We empirically examine the relationship between capital accumulation, vintage and productivity of industries in Japan using firm-level microdata. Our analyses confirm that vintage significantly influenced productivity during the period of economic expansion. The effect was particularly notable during the upturn that started in 2000, when most examined industries displayed strong vintage effects. The rejuvenation of capital equipment during this period clearly resulted from a strong productivity effect. During the economic bubble of the late 1980s, by contrast, vintage exerted no observable effects on productivity despite significant increase in investment. This finding shows that an increase in capital stock during this period was not necessarily productive and likely produced a merely temporary boom. We reconfirm that the relation between vintage and productivity changed in subtle ways in response to the phases of business cycles.

This study examines the effectiveness of the Basel III capital framework for mitigating procyclical behavior in the banking sector regarding macroeconomic variability and uncertainty. Our sample includes Korean banking industry data from 2001 to 2018. Using fixed- and random-effects panel data and fixed-effects difference-in-differences approaches, we discover that procyclicality in banks’ performance and capital factors is mitigated after the Basel III accord is adopted. The capital adequacy ratio’s volatility increases, whereas the loans-to-assets ratio increases and stabilizes. The Basel III accord therefore effectively serves its intended purpose, as it encourages banks to serve as shock absorbers for the economy and reduces economic uncertainty.

More than a thousand unstable periodic orbits with relatively low periods are identified from a continuous dynamical system which represents business cycles of two countries with different fiscal policies. Patterns of regimes and regime transitions are clearly recognized by using the detected periodic orbits. Both regimes and regime transitions are essential structures in chaotic business fluctuations generated by interactive behavior among workers, entrepreneurs and governments.

In the present paper, we investigate the chaotic implications of a seven-equation model of the business cycle. The main distinguishing features of the model are related to: (a) the role played by the bargaining power in the process of income redistribution; (b) the consideration of hysteresis effects on workers’ consumption demand; (c) the effect of public expenditure on labor productivity. In addition, the role played by the agents’ memory on the actual dynamics of the economic system, with particular regard to their learning-by-doing process, is particularly emphasized. Under all these assumptions, the system exhibits a rich and complex phenomenology, characterized by a number of transitions to chaos (in particular via sequences of period doubling bifurcations), aperiodic behavior, bistability, tristability, etc. We maintain that our analysis takes us another step forward in the building of a more general model of the business cycle. In particular, the model we propose may be of help in the explanation of some peculiar features of advanced capitalist economies, with particular regard to the role played by the State in the determination of agents’ disposable income, to the debt dynamics of the various macroagents, and to the main dilemmas of economic policy. More in general, the main lesson one learns from our investigation is that “disequilibrium paths”, characterized by “complicated” dynamics which, more often than not, takes the form of aperiodic motion, should be considered as the “normal” state of the system.

We analyse the Hopf bifurcations in the Kaldor–Kalecki business cycle model represented by a delay differential equation system.

In this study, we attempt to calculate the term structure of the interest rate under partial information using a model in which the mean reversion level of the short rate changes in accordance with a regime shift in the economy. Under partial information, an investor observes the history of only the short rate and not a regime shift; hence, calculating the term structure of the interest rate is reduced to the problem of filtering the current regime from observable short rates. Therefore, we calculate it using the filtering theory that estimates a stochastic process from noisy observations, and investigate the effects of the regime shift under partial information on the market price of risk and the volatility of a bond price compared with those under full information, in which the regime is assumed to be observable. We find that, under partial information, the regime-shift risk converts into the diffusion risk. As a result, we find that both the market price of diffusion risk and the volatility of a bond price under partial information become stochastic, even though these under full information are constant.

Power law behavior is an emerging property of many economic models. In this paper we emphasize the fact that power law distributions are persistent but not time invariant. In fact, the scale and shape of the firms' size distribution fluctuate over time. In particular, on a log–log space, both the intercept and the slope of the power law distribution of firms' size change over the cycle: during expansions (recessions) the straight line representing the distribution shifts up and becomes less steep (steeper). We show that the empirical distributions generated by simulations of the model presented in Ref. 11 mimic real empirical distributions remarkably well.

This paper studies dynamic asset allocations across stocks, Treasury bonds, and corporate bond indices. We employ a new model where liquidity plays an important role in forecasting excess returns. We document the significant utility benefits an investor gains by optimally including corporate bond indices in his portfolio. The benefits are bigger for lower-grade bonds. We also find that investment-grade indices are different from high-yield indices in that different risks are priced in these two asset classes. One important difference is that there exist positive "flight-to-liquidity" premia in investment-grade bonds, but we find no such premia in high-yield bonds. We calculate the portfolio behavior and the utility benefits for three types of investors, the "sophisticated", the "average" and the "lazy" investor. We provide practical portfolio advice on investing throughout the business cycle and we study how the total allocations and hedging demands vary with the business conditions. In addition, utilizing our model, we evaluate the significance of the liquidity variable information for the investor. We find that the liquidity information greatly enhances the investor's portfolio performance. Finally, further support in the optimality of the strategies is provided by calculating their in- and out-of-sample realized returns for the last decade.

To quantify the impact of business cycles on the dynamics of credit ratings, conditional migration matrices and probabilities of the corresponding macroeconomic scenarios are estimated. The approach is tested on a Standard and Poor’s (S&P’s) dataset that covers the period from 1991 to 2013. The difference between the conditional probabilities and their unconditional counterparts is evaluated. It is the greatest, up to $300\%$, for contraction periods and downgrading probabilities.

We decompose the standard consumption beta into two components that measure consumption risk in high and low economic activity states. Recessionary consumption risk commands a positive and statistically significant compensation, while the market price of expansionary consumption risk is not robust. The two-beta model explains well the cross-section of excess returns on book-to-market-, size-, and momentum-sorted portfolios, and substantially outperforms the traditional one-beta model. The results hold through for various business cycle classifications and alternative consumption measures.

The main objective of this study is to examine the behavior of capital buffer (whether procyclicality or countercyclical) for Pakistani banks after implementation of the BASEL-II and BASEL-III accord. The sample in this study consists of 34 commercial banks of Pakistan during the period from 2006 to 2015. The impact of business cycle on Capital Buffer has been obtained by using the two-step system Generalized Method of Moment estimation technique. The empirical findings suggest that the behavior of the banks found to be procyclicality in whole sample period while it turns to be counter-cyclical after implementation of Basel-III accord.

This paper revisited the relationship between capital buffers and risk adjustments by showing the impact of the business cycle. Empirically, we used an unbalanced panel dataset from 426 banks of the BRIC countries (i.e., Brazil, Russia, India, and China) for the period 2007–2016. By using the two-step system GMM (2GMM), this study shows the results as: (i) capital buffers of Russia, India, and China behave counter-cyclically while it is pro-cyclical for Brazilian banks over the business cycle; (ii) in BRIC’s economy, credit risk, and bank financial stability is related to business cycle in counter and pro-cyclical fashion, respectively; (iii) capital buffers adjustment speed is the premier in China and India, shining banks accessibility to capital refill is much easier to Brazil and Russia. The adjustment speed is heterogeneous across countries; and (iv) financial stability in apex for the Chinese, Russian, and Indian banks apart from the Brazilian banks.

This paper explores the relationship between trade growth and long-run trends in real GDP growth from a purely empirical perspective. Its novelty lies in the way that it models trade growth: as a function of cyclical trends in real GDP growth. The main finding is that trade growth responds asymmetrically to deviations from long-run GDP growth. Generally, trade growth is positive and statistically significant when GDP growth is above the long-run trend. On the other hand, trade growth ceases but does not become negative when GDP growth falls below its long-run trend. While this behavior holds true broadly, individual countries’ trade growth may respond differently when GDP growth is above or below trend. Comparatively, low-income countries’ trade growth takes the greatest hit when economic growth slows, while lower-middle and high-income countries are least affected. These findings have potential implications for trade policy-making in the twenty-first Century especially given the current atmosphere of anti-globalization and slow trade growth.

To the extent that many natural phenomena with long-term dependence inherently impact economic activity, it is reasonable to suspect that some of this dependence would reflect on key macroeconomic time series despite an apparent lack of orderly patterns in their behavior. To test this hypothesis, Rescaled Range (R/S) analysis is applied to U.S. business cycle durations. R/S is also modified to an “adaptive” rescaled range technique. The findings indicate that business cycles tend to have a long-term memory. Antipersistence is revealed as what links cyclical durations; longer cycles precede shorter ones, and vice-versa. This finding translates into a rejection of the alternate hypothesis of randomness in cyclical turning points.

In this chapter, we explore the issues raised by attempts to coordinate monetary policy among G20 countries. There is very limited knowledge about the impact of monetary policy in the G7 countries on other G20 economies.We therefore study the effect of US monetary policy decisions on exchange rate, interest rate and export for a panel of non-G7 countries such as Mexico, Korea, China, and India. Using an identification framework based on the heteroscedasticity of structural shocks, we show that the impact of US monetary policy on different developing countries is not the same and is also different compared to G7 countries. Therefore, we conclude that coordinated monetary actions among G20 members need to be based on a better understanding of the interdependencies among G20 members.

We consider the interaction between an incumbent firm and a potential entrant, and examine how this interaction is affected by demand fluctuations. Our model gives rise to procyclical entry, prices, and price-cost margins, although the average price in the market can be countercyclical if the entrant is a first mover, and capacity utilization can be either pro- or countercyclical if the incumbent is a first mover. Moreover, our results show that entry deterrence by the incumbent firm can either amplify or dampen the effect of demand fluctuations on prices, price-cost margins, and capacity utilization.

In this chapter, we explore how long-run mean reversion in stock returns could have significant implication on the forecast or predictability of such returns.