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IS BUSINESS CYCLE ASYMMETRY INTRINSIC IN INDUSTRIALIZED ECONOMIES?

  • James Morley (a1) and Irina B. Panovska (a2)
Abstract

We consider a model-averaged forecast-based estimate of the output gap to measure economic slack in 10 industrialized economies. Our measure takes changes in the long-run growth rate into account and, by addressing model uncertainty using equal weights on different forecast-based estimates, is robust to different assumptions about the underlying structure of the economy. For all 10 countries in the sample, we find that the estimated output gap has much larger negative movements during recessions than positive movements in expansions, suggesting business cycle asymmetry is an intrinsic characteristic of industrialized economies. Furthermore, the estimated output gap is always strongly negatively correlated with future output growth and unemployment and positively correlated with capacity utilization. It also implies a convex Phillips Curve in many cases. The model-averaged output gap is reliable in real time in the sense of being subject to relatively small revisions.

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Corresponding author
Address correspondence to: Irina B. Panovska, Department of Economics, Rauch Business Center #457, Lehigh University, 621 Taylor Street, Bethlehem, PA, USA. e-mail: irp213@lehigh.edu. Phone: (610) 758–1068.
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An earlier version of this study that focused on Asia-Pacific economies circulated under the title of “Measuring Economic Slack: A Forecast-Based Approach with Applications to Economies in Asia and the Pacific.” We thank the associate editor and two anonymous referees for helpful comments and suggestions. We also thank Stephane Dees, Jun Il Kim, Aaron Mehrotra, Tim Robinson, James Yetman, and Alex Nikolsko-Rzhevskyy, as well as conference and seminar participants at the 2018 Conference of the International Association for Applied Econometrics, 2017 Symposium of the Society for Nonlinear Dynamics and Econometrics, the Bureau of Economic Analysis, Lafayette College, the University of Wisconsin Whitewater, People’s Bank of China-BIS Conference on “Globalisation and Inflation Dynamics in Asia and the Pacific,” the “Continuing Education in Macroeconometrics” workshop at the University of New South Wales, the Sydney Macroeconomics Readings Group, the European Central Bank, and the University of Technology Sydney for helpful questions and comments. The usual disclaimers apply.

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