The Business Cycle Effects of Seasonal Shocks

Conventional wisdom emphasizes supply and demand shocks as the major sources of the business cycle. Yet the most visible, most synchronized, and most frequently encountered supply and demand shocks take place at the seasons. The central question to be addressed in this paper is to what extent impulses at the seasonal frequency are responsible for business cycles? Despite strong empirical evidence suggesting that seasonal fluctuations and business cycle fluctuations are closely related, questions like this are difficult to answer because of the lack of effective methods for identifying seasonal versus non-seasonal shocks. Traditional methods of measurement and identification (such as the use of seasonal dummies to isolate the seasonal and non-seasonal components) are inadequate and inappropriate because they fail to take into account the possible interactions between seasonal fluctuations and business-cycle fluctuations. In this paper, we develop a procedure that allows us to identify seasonal shocks versus non-seasonal shocks. We found that seasonal shocks account for the bulk of business-cycle fluctuations in US output (roughly 50%). The finding suggests that models relying heavily on technology shocks to explain the business cycle are misspecified, that using seasonally adjusted data to evaluate business cycle models can lead to incorrect conclusions, and that theories of the business cycle, as well as government policies concerning the business cycle ought to address seasonal fluctuations seriously.