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The duration of business cycle expansions and contractions: Are there change-points in duration dependence?

  • Vitor Castro

    ()

    (Faculdade de Economia, Universidade de Coimbra, Portugal / NIPE)

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.

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File URL: http://gemf.fe.uc.pt/workingpapers/pdf/2010/gemf_2010-18.pdf
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Paper provided by GEMF - Faculdade de Economia, Universidade de Coimbra in its series GEMF Working Papers with number 2010-18.

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Length: 39 pages
Date of creation: Aug 2010
Date of revision:
Publication status: Published in Empirical Economics 44(2): 511-544, 2013.
Handle: RePEc:gmf:wpaper:2010-18
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  1. Castro, Vítor, 2008. "The duration of economic expansions and recessions : More than duration dependence," The Warwick Economics Research Paper Series (TWERPS) 860, University of Warwick, Department of Economics.
  2. Francis X. Diebold & Glenn Rudebusch & Daniel Sichel, 1993. "Further Evidence on Business-Cycle Duration Dependence," NBER Chapters, in: Business Cycles, Indicators and Forecasting, pages 255-284 National Bureau of Economic Research, Inc.
  3. Alexander Perruchoud, 2008. "Analyzing the Swiss Business Cycle," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 54(4), pages 255-292.
  4. Francis X. Diebold & Glenn D. Rudebusch & Daniel E. Sichel, 1990. "International evidence on business cycle duration dependence," Discussion Paper / Institute for Empirical Macroeconomics 31, Federal Reserve Bank of Minneapolis.
  5. J. Michael Durland & Thomas H. McCurdy, 1993. "Duration Dependent Transitions in a Markov Model of U.S. GNP Growth," Working Papers 887, Queen's University, Department of Economics.
  6. Kiefer, Nicholas M, 1988. "Economic Duration Data and Hazard Functions," Journal of Economic Literature, American Economic Association, vol. 26(2), pages 646-79, June.
  7. Haigang Zhou & Steven Rigdon, 2008. "Duration dependence in US business cycles: An analysis using the modulated power law process," Journal of Economics and Finance, Springer, vol. 32(1), pages 25-34, January.
  8. Zuehlke, Thomas W, 2003. "Business Cycle Duration Dependence Reconsidered," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(4), pages 564-69, October.
  9. Francis X. Diebold & Glenn D. Rudebusch, 1988. "A nonparametric investigation of duration dependence in the American business cycle," Working Paper Series / Economic Activity Section 90, Board of Governors of the Federal Reserve System (U.S.).
  10. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July.
  11. Layton, Allan P. & Smith, Daniel R., 2007. "Business cycle dynamics with duration dependence and leading indicators," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 855-875, December.
  12. Gerhard Bry & Charlotte Boschan, 1971. "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs," NBER Books, National Bureau of Economic Research, Inc, number bry_71-1, October.
  13. Davig Troy, 2007. "Change-Points in U.S. Business Cycle Durations," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 11(2), pages 1-23, May.
  14. Nicholas Di Venuto & Allan Layton, 2005. "Do The Phases Of The Business Cycle Die Of Old Age?," Australian Economic Papers, Wiley Blackwell, vol. 44(3), pages 290-305, 09.
  15. Chang-Jin Kim & Charles R. Nelson, 1998. "Business Cycle Turning Points, A New Coincident Index, And Tests Of Duration Dependence Based On A Dynamic Factor Model With Regime Switching," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 188-201, May.
  16. Jonathan Ohn & Larry W. Taylor & Adrian Pagan, 2004. "Testing for duration dependence in economic cycles," Econometrics Journal, Royal Economic Society, vol. 7(2), pages 528-549, December.
  17. Daniel E. Sichel, 1989. "Business cycle duration dependence: a parametric approach," Working Paper Series / Economic Activity Section 98, Board of Governors of the Federal Reserve System (U.S.).
  18. 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.
  19. Gerhard Bry & Charlotte Boschan, 1971. "Foreword to "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs"," NBER Chapters, in: Cyclical Analysis of Time Series: Selected Procedures and Computer Programs, pages -1 National Bureau of Economic Research, Inc.
  20. Pok-sang Lam, 2004. "A Markov-Switching Model Of Gnp Growth With Duration Dependence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(1), pages 175-204, 02.
  21. Jushan Bai, 1997. "Estimation Of A Change Point In Multiple Regression Models," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 551-563, November.
  22. Donald W. K. Andrews, 2003. "Tests for Parameter Instability and Structural Change with Unknown Change Point: A Corrigendum," Econometrica, Econometric Society, vol. 71(1), pages 395-397, January.
  23. Iiboshi, Hirokuni, 2007. "Duration dependence of the business cycle in Japan: A Bayesian analysis of extended Markov switching model," Japan and the World Economy, Elsevier, vol. 19(1), pages 86-111, January.
  24. Abderrezak, Ali, 1998. "On the Duration of Growth Cycles: An International Study," International Review of Economics & Finance, Elsevier, vol. 7(3), pages 343-355.
  25. Roberto G. Gutierrez & Shana Carter & David M. Drukker, 2001. "On boundary-value likelihood-ratio tests," Stata Technical Bulletin, StataCorp LP, vol. 10(60).
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