DP5756 The Brevity and Violence of Contractions and Expansions

Author(s): Alisdair McKay, Ricardo Reis
Publication Date: July 2006
Keyword(s): asymmetric cycles, business cycles, economic expansions and contractions, unemployment
JEL(s): E23, E24, E32, J60
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5756

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.