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Fluctuations in confidence and asymmetric business cycles

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  • Simon M. Potter

Abstract

There is now a great deal of empirical evidence that business cycle fluctuations contain asymmetries. The asymmetries found in post-war U.S. data are inconsistent with the behavior of the U.S. economy in the Great Depression. In a model where business cycle asymmetries are produced by rational fluctuations in the confidence of investors, I examine whether this inconsistency can be explained by differences in government policy. It is found that the 'ineptness' of government intervention during the Great Depression in reducing the confidence of investors rather than the success of post-war stabilization policy in raising confidence is the most likely explanation.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 66.

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Date of creation: 1999
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Handle: RePEc:fip:fednsr:66

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Related research

Keywords: Business cycles ; Depressions ; Monetary policy;

References

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  1. Nathan S. Balke & Mark A. Wynne, 1994. "The dynamics of recoveries," Working Papers 94-06, Federal Reserve Bank of Dallas.
  2. Beaudry, Paul & Koop, Gary, 1993. "Do recessions permanently change output?," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 149-163, April.
  3. Simon M. Potter, 1993. "A Nonlinear Approach to U.S. GNP," UCLA Economics Working Papers 693, UCLA Department of Economics.
  4. Kim, C-J., 1991. "Dynamic Linear Models with Markov-Switching," Papers 91-8, York (Canada) - Department of Economics.
  5. Lang, William W. & Nakamura, Leonard I., 1990. "The dynamics of credit markets in a model with learning," Journal of Monetary Economics, Elsevier, vol. 26(2), pages 305-318, October.
  6. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 441-63, August.
  7. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
  8. Neftci, Salih N, 1984. "Are Economic Time Series Asymmetric over the Business Cycle?," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 307-28, April.
  9. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  10. Lee, I.H. & Chalkley, M., 1994. "Asymmetric business cycles," Discussion Paper Series In Economics And Econometrics 9411, Economics Division, School of Social Sciences, University of Southampton.
  11. Friedman, Milton, 1993. "The "Plucking Model" of Business Fluctuations Revisited," Economic Inquiry, Western Economic Association International, vol. 31(2), pages 171-77, April.
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Cited by:
  1. Eran Guse, 2004. "Expectational Business Cycles," Money Macro and Finance (MMF) Research Group Conference 2004 97, Money Macro and Finance Research Group.
  2. M Sensier & D van Dijk, 2001. "Short-term Volatility versus Long-term Growth: Evidence in US Macroeconomic Time Series," Centre for Growth and Business Cycle Research Discussion Paper Series 08, Economics, The Univeristy of Manchester.
  3. Bob McNabb & Karl Taylor, 2002. "Business Cycles and the Role of Confidence: Evidence from Europe," Discussion Papers in Economics 02/3, Department of Economics, University of Leicester.
  4. Laura Veldkamp, 2003. "Learning Asymmetries in Real Business Cycles," Working Papers 03-21, New York University, Leonard N. Stern School of Business, Department of Economics.

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