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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.

Suggested Citation

  • Vitor Castro, 2010. "The duration of business cycle expansions and contractions: Are there change-points in duration dependence?," GEMF Working Papers 2010-18, GEMF, Faculty of Economics, University of Coimbra.
  • Handle: RePEc:gmf:wpaper:2010-18
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    References listed on IDEAS

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    Cited by:

    1. Vitor Castro & Megumi Kubota, 2013. "Duration dependence and change-points in the likelihood of credit booms ending," GEMF Working Papers 2013-17, GEMF, Faculty of Economics, University of Coimbra.
    2. Ricardo M. Sousa, 2015. "What is the impact of wealth shocks on asset allocation?," Quantitative Finance, Taylor & Francis Journals, vol. 15(3), pages 493-508, March.
    3. Agnello, Luca & Castro, Vitor & Sousa, Ricardo M., 2013. "What determines the duration of a fiscal consolidation program?," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 113-134.
    4. 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.
    5. Etoundi Atenga, Eric Martial, 2017. "On the Determinants of output Co-movements in the CEMAC Zone:Examining the Role of Trade, Policy Channel, Economic Structure and Common Factors," MPRA Paper 82091, University Library of Munich, Germany.

    More about this item

    Keywords

    business cycles; expansions; contractions; duration dependence.;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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