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Should Policy Makers Worry about Asymmetries in the Business Cycle?

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  • Boldin Michael D.

    (RFA, Inc.)

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    Abstract

    This paper reconsiders the conventional use of econometric models, especially identified vector autoregressive models, in guiding monetary policy. The main question I explore is whether these models are seriously flawed because they ignore asymmetries in the business cycles. Toward that end, models that allow for asymmetric business cyclesÑdefined by the case where recessions and expansions are not mirror images of each otherÑare estimated. The results suggest that policy makers should worry about asymmetries in business cycles because most econometric models cannot capture empirically important asymmetries. In particular, estimated multiregime models show that the effects of monetary policy are stronger during turning points and outright recessions than in expansions. I conclude that the symmetry/asymmetry question has as much, and maybe even more, practical significance than debates over identification assumptions that have influenced much of the empirical macroeconomic literature over the past 20 years.

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    Bibliographic Info

    Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

    Volume (Year): 3 (1999)
    Issue (Month): 4 (January)
    Pages: 1-20

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    Handle: RePEc:bpj:sndecm:v:3:y:1999:i:4:n:3

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    Web page: http://www.degruyter.com

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    Cited by:
    1. Arango, Luis E. & Melo, Luis F., 2006. "Expansions and contractions in Brazil, Colombia and Mexico: A view through nonlinear models," Journal of Development Economics, Elsevier, vol. 80(2), pages 501-517, August.
    2. Charles Ka Yui Leung & Nan-Kuang Chen & Chih-Chiang Hsu, 2004. "Structural Break or Asymmetry? An Empirical Study of the Stock Wealth Effect on Consumption," Econometric Society 2004 Far Eastern Meetings 690, Econometric Society.
    3. Luis Eduardo Arango & Luis Fernando Melo, 2001. "Expansions and Contractions in Some Latin American Countries: A View Throught Non- Linear Models," BORRADORES DE ECONOMIA 002691, BANCO DE LA REPÚBLICA.
    4. Tsong, Ching-Chuan & Lee, Cheng-Feng, 2011. "Asymmetric inflation dynamics: Evidence from quantile regression analysis," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 668-680.
    5. Coakley, Jerry & Fuertes, Ana-Maria, 2006. "Testing for sign and amplitude asymmetries using threshold autoregressions," Journal of Economic Dynamics and Control, Elsevier, vol. 30(4), pages 623-654, April.
    6. Lee, Cheng-Feng & Hu, Te-Chung & Li, Ping-Cheng & Tsong, Ching-Chuan, 2013. "Asymmetric behavior of unemployment rates: Evidence from the quantile covariate unit root test," Japan and the World Economy, Elsevier, vol. 28(C), pages 72-84.
    7. Martin Sola & Zacharias Psaradakis, 2002. "On Detrending and Cyclical Asymmetry," Department of Economics Working Papers 020, Universidad Torcuato Di Tella.
    8. Narayan, Paresh Kumar & Popp, Stephan, 2009. "Investigating business cycle asymmetry for the G7 countries: Evidence from over a century of data," International Review of Economics & Finance, Elsevier, vol. 18(4), pages 583-591, October.

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