An economic cycles analisys from a dual perspective

Abstract

The analysis of economic cycles constitutes a long tradition in the economic literature. It has been a major concern from ancient civilizations to the current economies, which have always tried to understand economic fluctuations. Comparing primary (which were highly dependent of climate fluctuations) to modern civilizations (originated since the Industrial Revolution), the underlying structures, interactions and complexity of the economic systems have continuously evolved. However, the interest on the causes and effects of the economic cycles remains intact. Besides this evolution, modern economies have exhibited a strong and well defined growing trend in the last decades. Although focusing on the US economy, Hamilton in a paper published in 2011 lists the traditional main sources of this sustained uprising movement: the population growth, the accumulation of capital stock, and the technological and human capital progress. However, this author also points out that the economies do not experience a positive change every single year. The periods in which the economic activity breaks its growing trend, are widely known as economic recessions. In fact, the recursive evolution of "ups" (known as expansions), which are followed by "downs" (recessions) in the economic activity are known as the economic cycles. Although the concept of economic cycle is apparently simple, a much more complex reality is masked. In other words, the economic cycle complexities contain several dimensions which might be reflected through different questions. In this line, the purpose of this thesis is to acquire a better and suitable knowledge and understanding of some of these open questions in the analysis of economic cycles. The main questions I try to answer are the following: Do economic cycles evidence a particular pattern of aggregation in certain economic areas? Do economic cycles produce tangible effects on human beings lives? Which kind of indicators are more suitable for forecasting economic recessions? Do these answers rely on the economic cycle concept? And on the degree of economic development? This dissertation aims to contribute to the existing literature in different ways. The first chapter focuses on the evolution of the Latin American cycles from 1980 to 2013. By using the Industrial Production Index, I examine the evolution of economic synchronization and other relevant features of the economic cycles such as duration, amplitude, excess, deepness and steepness. Besides the search of common patterns or country-subgroups, this chapter seeks for concept-specific differences (business or growth cycle). In addition, the study examines whether the Great Recessions produced any significant impact on the underlying cycles distributions. Regardless of the concept used to define the economic cycle, I find relevant links across the economic cycles of the Latin American nations. However, I also detect certain countries which exhibit idiosyncratic patterns. Regarding the Great Recessions, the study failed to find significant impacts on the underlying cycle patterns. The second chapter addresses the impact of economic recessions on inequality. For this purpose, I employ local projections to examine the impact of business and growth cycles on income inequality measured through the Gini index. The focus is global and comprises the period between 1960 and 2014. Overall, I find that both definitions of economic recessions failed to generate significant impacts on income inequality, once other relevant controls are included in the model. Besides, the analysis detects distinguishing patterns according to the degree of economic development and geographical region. In the last chapter of my dissertation, the predictive content of the OECD Main Economic Indicators is examined to anticipate economic recessions in a broad set of countries. For this purpose, we use Receiver Operating Characteristic (ROC) techniques that measure the net forecasting ability to perform inferences on the economic cycle of each indicator at different forecasting horizons. The main findings of this chapter are the following. The OECD Main Economic Indicators Database evidences an overall accurate performance in predicting growth cycle and business cycle recessions. However, there are significant differences according to the degree of economic development of the countries. In addition, some simple indicators (especially financial ones) perform better than the OECD Main Economic Indicators composite ones.