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Do business cycles result from stochastic shocks?

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  • Zhu, Yi

Abstract

According to the real business cycle theory, business cycles mainly result from random exogenous shocks. In this paper, this argument is tested. I extend the Wald–Wolfowitz runs test under the assumption that a recession lasts for two periods at least and an expansion lasts for $k$ periods at least with k ≥ 2. I apply the extended runs test to the three two-valued data recession-expansion series generated by the National Bureau of Economic Research and the Center for Economic and Policy Research. The test results reject the null hypothesis that they are generated in a random way for any $k$ even at the 1% significance level.

Suggested Citation

  • Zhu, Yi, 2024. "Do business cycles result from stochastic shocks?," Macroeconomic Dynamics, Cambridge University Press, vol. 28(5), pages 1150-1160, July.
    • Handle: RePEc:cup:macdyn:v:28:y:2024:i:5:p:1150-1160_7
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