Emanuel Moench, Tobias Stein, 12 September 2021

The US equity market follows a V-shaped pattern around recessions, with sharply negative returns heading into recessions and a strong recovery as the recession unfolds. In addition, recessions are usually preceded by an inverted yield curve. This column shows that the term spread is a robust predictor of recessions, and that model-implied recession probability forecasts do a good job of predicting the equity premium out-of-sample. An investment strategy based on the recession probability model could be used to time the equity market and lead to higher and less volatile profits over time.

Lutz Kilian, Nikos Nomikos, Xiaoqing Zhou, 15 July 2021

An essential feature of the globalisation of the economy since the 1990s has been the growing importance of sea-borne container trade for supply chains. This column develops a monthly index of North American container trade since 1997 and incorporates it into a model of the US economy. It shows that rising and falling frictions in container shipping markets help explain the US business cycle and recovery from the Covid-19 recession. The model suggests that the recovery since the start of the pandemic has been slower than raw data suggest and finds evidence of favourable foreign demand and container market shocks. 

Michal Gradzewicz, 26 March 2020

Capital investment at firm level can have both short-run and long-run effects on labour productivity. This column uses evidence from Poland to explore the relationship further. It is clear that different types and sizes of firms, from various sectors, demonstrate a range of trends. What is notable is that the impact of ‘learning by doing’ runs deep and affects the initial decision process of the capital investment itself. 

Martin Hodula, 16 March 2020

The shadow banking system has become an important source of funding worldwide for the real economy over the last two decades. Europe is no exception, though research on shadow banking there has been relative scarce. This column shows that European shadow banking is highly procyclical, intertwined with insurance corporations and pension funds, and a terminal station for regulatory arbitrage. It also discusses the existence of two main motives that explain the growth of shadow banking, both prior and post-Global Crisis: a funding-cost motive and a search-for-yield motive. 

Francois de Soyres, Alexandre Gaillard, 21 September 2019

The recent increase in business cycle synchronisation is significantly associated with trade in intermediate inputs. This is an important consequence of global value chains, but we cannot understand it if we use a model in which real GDP movements are simply decomposed into changes in technology and factor supply. This column argues that accounting for profits and extensive margin adjustments reconciles theory and data and enriches our understanding of what makes countries interdependent, offering the first quantitative solution to the 'trade co-movement puzzle'.

Franck Portier, 03 May 2019

Business economists argue that the length of an expansion is a good indicator of when a recession will hit. Using both parametric and non-parametric measures, this column finds strong support for the theory from post-WWII data on the US economy. The findings suggest there is good reason to expect a US recession in the next two years.

Wouter den Haan, Thomas Drechsel, 16 January 2019

It is unavoidable that empirical models are misspecified in various ways, but adopted empirical methodologies rarely address this. This column focuses on the misspecification of exogenous structural disturbances which are the forces that drive fluctuations in modern business cycle models. It shows that the conclusions drawn from estimated models can be severely distorted if structural disturbances enter the model in an incorrect way, even if the misspecification is minor. It proposes the novel concept of an agnostic structural disturbance, which can be used to detect and correct for misspecification of structural disturbances. While agnostic in nature, studying how ASDs affect model properties enables us to give them an economic interpretation.


The European Association of Young Economists (EAYE), in collaboration with Leipzig University, is pleased to announce that the 1st EAYE Workshop will take place at Leipzig University on September 10-11, 2018.

Since the Great Recession, research on housing and macroeconomics has become a highly relevant and vibrant research field within macroeconomics. What drives house-price fluctuations? How do pronounced fluctuations in house prices and housing credit affect the real economy? What explains the long run dynamics of house prices? The aim of the workshop is to bring together young economists, as well as a few distinguished senior researchers, that work on these pressing questions and on housing and macroeconomics in general.

We are delighted to announce that two keynote lectures will be given by Alberto Martín (CREI, Universitat Pompeu Fabra, Barcelona GSE, CEPR) and Moritz Schularick (University of Bonn, CEPR).

The submission deadline is June 7, 2018.

Julia Bredtmann, Sebastian Otten, Christian Rulff, 21 December 2017

Little is known about how unemployment shocks are absorbed within the household. This column uses longitudinal micro data for 28 European countries to investigate the effect of husbands’ job loss on wives’ labour supply. Overall, there is evidence that women increase their labour supply in response to their husband losing a job. However, the response varies over both the business cycle and across different welfare regimes.

Laura Nowzohour, Livio Stracca, 15 December 2017

At an intuitive level, economists and non-economists alike find it plausible that economic sentiment and economic developments are related. This column surveys recent theoretical and empirical work on the role of sentiment as a driver of the business cycle. Sentiment measures are found to be weakly correlated at the country level, but highly correlated across countries. Further, sentiment seems most closely correlated with economic and financial variables, and tends to be forward looking.

Roel Beetsma, Ward Romp, Ron van Maurik, 13 November 2017

Population ageing means that many current pension regimes are unsustainable, but the timing of pension reform measures is a political as well as an economic decision. This column uses new data on OECD pension reforms since 1970 to show that their timing has not been driven by projected demographic developments or political change, but by the state of the economy at the time when reforms were legislated. Pension systems have expanded more frequently during booms, and have contracted during economic downturns.

Mojmir Hampl, Tomas Havranek, 12 September 2017

Seven out of every ten Europeans live in their own homes, yet Europe’s most important inflation measure excludes the costs associated with owner-occupied housing. This column argues that including the costs of home ownership would prove beneficial to the conduct of monetary and macroprudential policy. It would also bring the measure closer to what most people consider inflation to be.

Stefan Gerlach, 01 August 2017

With the Eurozone in recovery, at some stage the ECB will raise interest rates. This column examines the conditions that might lead to this happening. A statistical analysis suggests that the likelihood of an interest rate increase is currently about 7%, but a combination of stronger growth and higher price pressures could quickly raise this to about 30%. A return of the ECB to its pre-crisis behaviour would also lead to a dramatic rise in the likelihood of an interest rate increase.

James Hamilton, 22 June 2017

In economic research, the Hodrick-Prescott filter is a widely used tool for removing cyclical components from time-series data. This column argues that, despite its popularity, the HP filter has serious drawbacks that should severely restrict its application. It involves several levels of differencing, so that for random walk series, subsequently observed patterns are likely to be artefacts of having applied the filter, rather than due to the underlying data-generating process. The column goes on to suggest an alternative to the HP filter that avoids these pitfalls. 

Ansgar Belke, Clemens Domnick, Daniel Gros, 19 January 2017

A high correlation of business cycles is usually seen as a key criterion for an optimum currency area. This column argues that the elasticity with which countries react to the common cycle is equally important. A country with a non-unitary growth elasticity relative to the common area will experience cyclical divergences at the peak and trough of the common cycle. Despite being characterised by highly-correlated business cycles, the Eurozone suffers from widely differing amplitudes. 

Alberto Alesina, Gualtiero Azzalini, Carlo Favero, Francesco Giavazzi, Armando Miano, 16 December 2016

When a government wants to cut a deficit, it must decide both how and when to do it. Research has treated the two questions as if they are independent, which risks attributing good policy to good timing, or vice versa. This column argues that when the effects are considered simultaneously, the composition of fiscal adjustments is much more important than the state of the cycle. Fiscal adjustments based upon spending cuts have losses that are on average close to zero, while those based upon tax increases are associated with large and prolonged recessions, regardless of whether or not the adjustment starts in a recession. 

Joshua Aizenman, Yothin Jinjarak, Huanhuan Zheng, 24 October 2016

The booms and busts of real estate prices echo those of the real business cycle. This column looks at the relationship between house price valuations and economic growth in an international context. Taking account of heterogeneity in housing policies across countries, large house price depreciations are found to be positively associated with economic growth. This positive relationship is more pronounced in countries with civil law legal systems.

Javier Cravino, Andrei Levchenko, 22 October 2016

Multinational production has become one of the most important means by which firms serve foreign markets. This column examines the role of multinational firms in aggregate business cycle transmission. The results suggest that the combined impact of all foreign multinationals is small but significant, accounting for about 10% of the productivity shocks in a typical country and leading to a somewhat more synchronised international business cycle.

Reamonn Lydon, Matija Lozej, 02 October 2016

The evolution of earnings over the business cycle has important implications for consumption and welfare. This column shows that the earnings of new hires in Ireland – and in particular, new hires with less valuable outside options – are substantially more flexible than those of incumbents during a recession. The results indicate that search and matching models that rely on the rigidity of wages of new hires to generate realistic volatility in job creation and unemployment may not be appropriate for strong business cycles.

Alisdair McKay, Ricardo Reis, 14 July 2016

Brexit has raised the possibility of a recession on both sides of the Atlantic. Unable to use traditional remedies like monetary or fiscal policy stimulus, policymakers may consider automatic fiscal stabilisers. This column examines the impact of automatic stabilisers through social insurance on the business cycle, and how its impact can be used to mitigate recession. Unemployment insurance or food stamps would be better than progressive taxes at stimulating aggregate demand. The main economic channels policymakers must consider are those related to risk and precautionary savings. 



CEPR Policy Research