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What's real about the business cycle?

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  • James D. Hamilton

Abstract

This paper argues that a linear statistical model with homoskedastic errors cannot capture the nineteenth-century notion of a recurring cyclical pattern in key economic aggregates. A simple nonlinear alternative is proposed and used to illustrate that the dynamic behavior of unemployment seems to change over the business cycle, with the unemployment rate rising more quickly than it falls. Furthermore, many but not all economic downturns are also accompanied by a dramatic change in the dynamic behavior of short-term interest rates. It is suggested that these nonlinearities are most naturally interpreted as resulting from short-run failures in the employment and credit markets and that understanding these short-run failures is the key to understanding the nature of the business cycle.

Suggested Citation

  • James D. Hamilton, 2005. "What's real about the business cycle?," Review, Federal Reserve Bank of St. Louis, vol. 87(Jul), pages 435-452.
  • Handle: RePEc:fip:fedlrv:y:2005:i:jul:p:435-452:n:v.87no.4
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    References listed on IDEAS

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    More about this item

    Keywords

    Unemployment; Interest rates; Business cycles;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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