The Brevity and Violence of Contractions and Expansions

73 Pages Posted: 13 Aug 2006 Last revised: 2 Apr 2007

See all articles by Alisdair McKay

Alisdair McKay

Boston University - Department of Economics

Ricardo Reis

London School of Economics & Political Science (LSE); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2006

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%u2013labor hoarding, a choice of when to scrap old technologies, and job training or job search%u2013can account for the business cycle fact.

Suggested Citation

McKay, Alisdair and Reis, Ricardo A.M.R., The Brevity and Violence of Contractions and Expansions (August 2006). NBER Working Paper No. w12400. Available at SSRN: https://ssrn.com/abstract=923052

Alisdair McKay

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States

HOME PAGE: http://people.bu.edu/amckay

Ricardo A.M.R. Reis (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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