Is Business Cycle Asymmetry Intrinsic in Industrialized Economies?

58 Pages Posted: 7 Oct 2016 Last revised: 18 Jun 2018

James Morley

University of Sydney

Irina Panovska

Lehigh University

Date Written: June 7, 2018

Abstract

We consider a model-averaged forecast-based estimate of the output gap to measure economic slack in ten industrialized economies. Our measure takes changes in the long-run growth rate into account and, by addressing model uncertainty using equal weights on different forecast-based estimates, is robust to different assumptions about the underlying structure of the economy. For all ten countries in the sample, we find that the estimated output gap has much larger negative movements during recessions than positive movements in expansions, suggesting business cycle asymmetry is an intrinsic characteristic of industrialized economies. Furthermore, the estimated output gap is always strongly negatively correlated with future output growth and unemployment and positively correlated with capacity utilization. It also implies a convex Phillips Curve in many cases. The model-averaged output gap is reliable in real time in the sense of being subject to relatively small revisions.

Keywords: output gap; model averaging; Markov switching; business cycle asymmetry; convex Phillips Curve

JEL Classification: E32, E37

Suggested Citation

Morley, James and Panovska, Irina, Is Business Cycle Asymmetry Intrinsic in Industrialized Economies? (June 7, 2018). Available at SSRN: https://ssrn.com/abstract=2843351 or http://dx.doi.org/10.2139/ssrn.2843351

James Morley (Contact Author)

University of Sydney ( email )

Rm 370 Merewether (H04)
Sydney, NSW 2006 2008
Australia

HOME PAGE: http://https://sites.google.com/site/jamescmorley/

Irina Panovska

Lehigh University ( email )

621 Taylor Street
Bethlehem, PA 18015
United States

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