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The duration of business cycle expansions and contractions: Are there change-points in duration dependence?

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  • Vitor Castro

    ()
    (Faculdade de Economia, Universidade de Coimbra, Portugal / NIPE)

Abstract

The issue of whether the likelihood of an expansion or contraction ending is dependent on its age,i.e whether they are duration dependent, is widely addressed in the business cycles literature and evidence of positive duration dependence is found in several studies. However, there is an important issue that has not been explored in this literature yet: the presence of change-points in duration dependence. All the studies in this field depart from the assumption that the magnitude of duration dependence is the same over time. However, we conjecture that the degree of likeliness of an expansion or contraction ending as it gets older might change after a specific duration. To test for that possibility, this paper will allow for the presence of a change-point in the analysis of the duration of expansions and contractions for a group of 13 European and Non-European industrial countries over the period 1948-2009. The evidence provided by the estimation of a continuous-time Weibull duration model shows strong support for the presence of positive duration dependence, which is stronger for contractions than for expansions. Results also show that contractions have become longer over time and that their length is negatively affected by the length of the previous expansion. Most importantly, this paper provides quite interesting evidence for the presence of a change-point in duration dependence for expansions, but not for contractions. Results show that the magnitude of the duration dependence parameter decreases significantly when an expansion surpasses 10 years of duration. In particular, evidence of positive duration dependence is no longer found when an expansion surpasses that threshold.

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Bibliographic Info

Paper provided by GEMF - Faculdade de Economia, Universidade de Coimbra in its series GEMF Working Papers with number 2010-18.

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Length: 39 pages
Date of creation: Aug 2010
Date of revision:
Publication status: Published in Empirical Economics 44(2): 511-544, 2013.
Handle: RePEc:gmf:wpaper:2010-18

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Keywords: business cycles; expansions; contractions; duration dependence.;

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References

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  1. Zuehlke, Thomas W, 2003. "Business Cycle Duration Dependence Reconsidered," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(4), pages 564-69, October.
  2. Jushan Bai, 1997. "Estimation Of A Change Point In Multiple Regression Models," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 551-563, November.
  3. Gerhard Bry & Charlotte Boschan, 1971. "Foreword to "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs"," NBER Chapters, in: Cyclical Analysis of Time Series: Selected Procedures and Computer Programs, pages -1 National Bureau of Economic Research, Inc.
  4. Castro, Vítor, 2008. "The duration of economic expansions and recessions : More than duration dependence," The Warwick Economics Research Paper Series (TWERPS) 860, University of Warwick, Department of Economics.
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  16. Pok-sang Lam, 2004. "A Markov-Switching Model Of Gnp Growth With Duration Dependence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(1), pages 175-204, 02.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Briefer economic cycles
    by Salil Mehta in Statistical Ideas on 2014-03-04 01:34:00
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Cited by:
  1. Luca Agnello & Vitor Castro & Ricardo M. Sousa, 2013. "What Determines the Duration of a Fiscal Consolidation Program?," GEMF Working Papers 2013-09, GEMF - Faculdade de Economia, Universidade de Coimbra.
  2. Castroa, Vitor & Kubota, Megumi, 2013. "Duration dependence and change-points in the likelihood of credit booms ending," Policy Research Working Paper Series 6475, The World Bank.
  3. Luca Agnello & Vítor Castro & Ricardo M. Sousa, 2012. "Are there change-points in the likelihood of a fiscal consolidation ending?," NIPE Working Papers 18/2012, NIPE - Universidade do Minho.

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