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Fluctuations in confidence and asymmetric business cycles

  • Simon M. Potter

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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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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  1. Potter, Simon M, 1995. "A Nonlinear Approach to US GNP," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(2), pages 109-25, April-Jun.
  2. 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.
  3. 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.
  4. 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.
  5. Friedman, Milton, 1993. "The "Plucking Model" of Business Fluctuations Revisited," Economic Inquiry, Western Economic Association International, vol. 31(2), pages 171-77, April.
  6. Beaudry, Paul & Koop, Gary, 1993. "Do recessions permanently change output?," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 149-163, April.
  7. 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.
  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. 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.
  10. Kim, Chang-Jin, 1994. "Dynamic linear models with Markov-switching," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 1-22.
  11. Nathan S. Balke & Mark A. Wynne, 1994. "The dynamics of recoveries," Working Papers 9406, Federal Reserve Bank of Dallas.
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