The Brevity and Violence of Contractions and Expansions
73 Pages Posted: 13 Aug 2006 Last revised: 2 Apr 2007
Date Written: August 2006
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.
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