What causes business cycles to elongate, or recessions to intensify?
Patrick Crowley () and
Andrew Hughes Hallett ()
Journal of Macroeconomics, 2018, vol. 57, issue C, 338-349
In this paper we use both New Keynesian and Classical monetary models to explain why volatility transfers from high to low frequency cycles occur, causing the business cycle to elongate, and how they could reverse. Our results show that an increase in inflation aversion or a reduction in the commitment to output stabilization would create volatility transfers sufficient to give rise to a great moderation, while a reversal of those commitments would take it away again. In short, the lower frequency cycles become more volatile at the expense of traditional business cycle frequencies, even though there are no reversals in the parameters that govern the economy’s underlying economic behaviour, dynamics or volatility. This implies we should expect less frequent but more severe recessions, with smoother business cycle expansion phases in between. We identify moderate expectations for output or earnings growth to be the key element that under-pins these results.
Keywords: New Keynesian model; Business cycles; Growth cycles; Time–frequency decomposition; Wavelet analysis; Empirical mode decomposition (search for similar items in EconPapers)
JEL-codes: C65 E19 E32 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:57:y:2018:i:c:p:338-349
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