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No More Rocking Horses: Trading Business-Cycle Depth for Duration Using an Economy-Specific Characteristic

  • Ossama Mikhail

Regarding the trade-off between the depth and the duration of recessions, there exists a mounting empirical evidence of the idiosyncratic and non-synchronized behavior of the business cycle over time within and across countries. In this paper, I propose a stochastic dynamic general equilibrium formulation wherein an economy-specific characteristic - labeled as the missing parameter - (e.g., the financial institutional framework and regulations) does control the magnitude, severity and persistence of the business cycle. The results of the simulations show that as much as 0.5 of a percentage point of GDP in depth and a relative difference of 3 years duration can be attributed to this parameter. Overlooked for decades, this missing parameter hypothesizes that Frisch's 'rocking-horse theory' of the business cycle is an inaccurate description of the business-cycle behavior.

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Paper provided by EconWPA in its series Macroeconomics with number 0402026.

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Length: 18 pages
Date of creation: 23 Feb 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0402026
Note: Type of Document - pdf; prepared on Win98; pages: 18; figures: 1
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