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The Brevity and Violence of Contractions and Expansions

Alisdair McKay () and Ricardo Reis

No 5756, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Early studies of business cycles argued that contractions in economic activity were briefer (shorter) and more violent (rapid) than expansions. This paper systematically investigates this claim and in the process discovers a robust new business cycle fact: expansions and contractions in output are equally brief and violent but contractions in employment are briefer and more violent than expansions. The difference arises because employment typically lags output around peaks but both series roughly coincide in their troughs. We discuss the performance of existing business cycle models in accounting for this fact, and conclude that none can fully account for it. We then show that a simple model that combines three familiar ingredients - labor hoarding, a choice of when to scrap old technologies, and job training or job search - can account for the business cycle fact.

Keywords: asymmetric cycles; business cycles; economic expansions and contractions; unemployment (search for similar items in EconPapers)
JEL-codes: E23 E24 E32 J60 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2006-07
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Journal Article: The brevity and violence of contractions and expansions (2008) Downloads
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