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Classical and modern business cycle measurement: The European case

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Hans-Martin Krolzig ()
Juan Toro ()

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Abstract

This paper intends to harmonize two different approaches employed in the analysis of business cycles and, in doing so, it retrieves the stylized facts of the business cycle in Europe. We start with the ‘classical’ approach proposed in Burns and Mitchell (1946) of dating and analyzing the business cycle. The stylized facts retrieved are commented and compared to those obtained by Harding and Pagan (2002) for the U.S.. Two conclusions can be extracted from the results: a) though the turning points obtained for individual countries seem to cluster and would suggest the idea of a common cycle, there are relevant differences in the stylized facts characterizing the business cycle in the individual European economies under analysis; b) moreover, we find relevant differences in the business cycle stylized facts of the European countries and the U.S., mostly in terms of the duration, the amplitude of the cycle and the shape of the recovery. We then adopt the ‘modern’ alternative: the Markov-switching vector autoregression (MS-VAR). The model’s regime probabilities provide an optimal statistical inference of the turning point of the European business cycle. For assessing the capacity of the parametric approach to generate the stylized facts of the classical cycle in Europe, the stylized facts of the original data are compared to those of simulated data. Contrary to the results reported by Harding and Pagan (2002) , we show that the MS-VAR model is a good candidate to be used as an statistical instrument to improve the understanding of the business cycle. Copyright Springer-Verlag Berlin/Heidelberg 2004

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Publisher Info
Article provided by Springer in its journal Spanish Economic Review.

Volume (Year): 7 (2004)
Issue (Month): 1 (January)
Pages: 1-21
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Handle: RePEc:spr:specre:v:7:y:2004:i:1:p:1-21

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Keywords: International business cycles; European Union; Markov switching; Structural breaks; Time series analysis;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Sichel, Daniel E, 1994. "Inventories and the Three Phases of the Business Cycle," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 269-77, July.
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  3. Hansen, Bruce E, 1992. "The Likelihood Ratio Test under Nonstandard Conditions: Testing the Markov Switching Model of GNP," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S61-82, Suppl. De. [Downloadable!] (restricted)
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  5. Andrew Ang & Geert Bekaert, 1998. "Regime Switches in Interest Rates," NBER Working Papers 6508, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. John H. Cochrane, 1995. "What do the VARs Mean?: Measuring the Output Effects of Monetary Policy," NBER Working Papers 5154, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Artis, Michael J & Zhang, W, 1997. "International Business Cycles and the ERM: Is There a European Business Cycle?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 2(1), pages 1-16, January. [Downloadable!] (restricted)
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  8. Gregory D. Hess & Shigeru Iwata, 1995. "Measuring business cycle features," Research Working Paper 95-10, Federal Reserve Bank of Kansas City. [Downloadable!]
  9. Mike Artis & Hans-Martin Krolzig & Juan Toro, 2002. "The European Business Cycle," Economic Working Papers at Centro de Estudios Andaluces E2002/19, Centro de Estudios Andaluces. [Downloadable!]
    Other versions:
  10. Pagan, Adrian, 1997. "Policy, Theory, and the Cycle," Oxford Review of Economic Policy, Oxford University Press, vol. 13(3), pages 19-33, Autumn.
  11. Don Harding & Adrian Pagan, 1999. "Dissecting the Cycle," Melbourne Institute Working Paper Series wp1999n13, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne. [Downloadable!]
  12. Hess, Gregory D & Iwata, Shigeru, 1997. "Measuring and Comparing Business-Cycle Features," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(4), pages 432-44, October.
  13. Bruce E. Hansen, 1995. "Erratum: The Likelihood ratio Test Under Nonstandard Conditions: Testing the Markov Switching Model of GNP," Boston College Working Papers in Economics 296., Boston College Department of Economics. [Downloadable!]
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  14. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September. [Downloadable!] (restricted)
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  15. Krozlig, H.M., 1997. "International Business Cycles: Regime Shifts in the Stochastic Process of Economic Growth," Economics Series Working Papers 99194, University of Oxford, Department of Economics.
  16. Tamim Bayoumi and Barry Eichengreen., 1992. "Shocking Aspects of European Monetary Unification," Economics Working Papers 92-187, University of California at Berkeley. [Downloadable!]
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  17. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70. [Downloadable!] (restricted)
  18. Robin L. Lumsdaine & Eswar S. Prasad, 1997. "Identifying the Common Component in International Economic Fluctuations," NBER Working Papers 5984, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  19. Adrian Pagan, 1997. "Towards an Understanding of Some Business Cycle Characteristics," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 30(1), pages 1-15. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Marie Bessec & Othman Bouabdallah, 2005. "What causes the forecasting failure of Markov-Switching models? A Monte Carlo study," Econometrics 0503018, EconWPA. [Downloadable!]
  2. Siem Jan Koopman & Joao Valle e Azevedo, 2003. "Measuring Synchronisation and Convergence of Business Cycles," Tinbergen Institute Discussion Papers 03-052/4, Tinbergen Institute. [Downloadable!]
  3. Dominique Guegan & Laurent Ferrara, 2005. "Detection of the Industrial Business Cycle using SETAR models," Post-Print halshs-00201309_v1, HAL. [Downloadable!]
    Other versions:
  4. Aka, B.F., 2004. "Do WAEMU Countries Exhibit a Regional Business Cycle?. A Simulated Markov Switching Model for a Western Africa area," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 4(4). [Downloadable!]
  5. Jesper Gregers Linaa, . "Idiosyncrasy of Business Cycles Across EU Countries," EPRU Working Paper Series 02-08, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
  6. M Artis, 2002. "Dating the Business Cycle in Britain," Centre for Growth and Business Cycle Research Discussion Paper Series 17, Economics, The Univeristy of Manchester. [Downloadable!]
  7. Michael Ehrmann, 2004. "Firm Size and Monetary Policy Transmission – Evidence from German Business Survey Data," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  8. Adanero-Donderis , M. & Darné, O. & Ferrara, L., 2007. "Deux indicateurs probabilistes de retournement cyclique pour l’économie française," Documents de Travail 187, Banque de France. [Downloadable!]
  9. Emanuel Mönch & Harald Uhlig, 2003. "Towards a Monthly Business Cycle Chronology for the Euro Area," SFB 649 Discussion Papers SFB649DP2005-023, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany, revised Apr 2005. [Downloadable!]
    Other versions:
  10. Máximo Camacho & Gabriel Pérez-Quirós & Lorena Saiz, 2005. "Do european business cycles look like one?," Banco de España Working Papers 0518, Banco de España. [Downloadable!]
    Other versions:
  11. Eric Girardin, 2004. "Regime-dependent synchronization of growth cycles between Japan and East Asia," Money Macro and Finance (MMF) Research Group Conference 2004 66, Money Macro and Finance Research Group. [Downloadable!]
  12. AKA, Bédia F., 2009. "Business Cycle And Sectoral Fluctuations: A Nonlinear Model For Côte D’Ivoire," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 9(1), pages 111-126. [Downloadable!]
  13. Maximo Camacho & Gabriel Perez-Quiros & Lorena Saiz & Universidad de Murcia, 2006. "Do european business cycles look like one $\_?$," Computing in Economics and Finance 2006 175, Society for Computational Economics. [Downloadable!]
  14. Laurent Ferrara & Dominique Guegan, 2006. "Real-time detection of the business cycle using SETAR models," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00185372_v1, HAL. [Downloadable!]
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