DP14290 'Stall Speed' and 'Escape Velocity': Empty Metaphors or Empirical Realities?

Author(s): Luke Bartholomew, Paul Diggle
Publication Date: January 2020
Keyword(s): business cycle asymmetry, conditional probabilities, escape velocity, kernel densities, Markov switching, Stall speed
JEL(s): C14, C22, E32
Programme Areas: Occasional Paper
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14290

'Stall speed' and 'escape velocity' are commonly heard but often vaguely defined physics metaphors used to describe apparent business cycle dynamics. Using GDP data for the OECD economies, we find evidence for the existence of a weak and a strong form of stall speed in the majority of these economies, but reject weak and strong form escape velocity everywhere. Specifically, we find higher probabilities of recession following periods of low growth, including non-linear increases in these probabilities around certain thresholds; but no equivalent decrease in recession probabilities after periods of high growth. We then employ Markov switching models as a secondary technique to test for distinct business cycle phases that might equate to stalls and escapes. This analysis rarely picks out stall speed and escape velocity as separate business cycle regimes, and instead points to a broader and more idiosyncratic suite of regimes rooted in individual economies' economic history. Taken together, these results suggest that stall speed dynamics are present in the GDP data generating process for many OECD economies, but they are not a strong enough feature to emerge as a defining characteristic of the business cycle. Our findings caution against the overuse of the stall speed and escape velocity metaphors in a macroeconomic context.