International Business Cycle Asymmetry and Time Irreversible Nonlinearities

Using tests of time reversibility, this paper provides further statistical evidence on the long-standing conjecture in economics concerning the potentially asymmetric behaviour of output over the expansionary and contractionary phases of the business cycle. A particular advantage of this approach is that it provides a discriminating test that is instructive as to whether any asymmetries detected are due to asymmetric shocks to a linear model, or an underlying non-linear model with symmetric shocks, and in the latter case is informative as to the potential form of that nonlinear model. Using a long span of international per capita output growth data, the asymmetry detected is overwhelmingly consistent with the long standing perception that the output business cycle is characterized by steeper recessions and longer more gentle expansions, but the evidence for this form of business cycle asymmetry is weaker in the data adjusted for the influence of outliers associated with wars and other extreme events. Statistically significant time irreversibility is reported for the output growth rates of almost all of the countries considered in the full sample data, and there is evidence that this time irreversibility is of a form implying an underlying nonlinear model with symmetrically distributed innovations for 15 of the 22 countries considered. However, the time irreversibility test results for the outlier-trimmed full sample data reveal significant time irreversibility in output growth for around one half of the countries considered, predominantly in Northern Europe and North America, and of a form implying a nonlinear underlying model in only a further half of those cases.