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Modeling long cycles

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  • Natasha Kang, Da
  • Marmer, Vadim

Abstract

Recurrent boom-and-bust cycles are a salient feature of economic and financial history. Cycles found in the data are stochastic, often highly persistent, and span substantial fractions of the sample size. We refer to such cycles as “long”. In this paper, we develop a novel approach to modeling cyclical behavior specifically designed to capture long cycles. We show that existing inferential procedures may produce misleading results in the presence of long cycles and propose a new econometric procedure for the inference on the cycle length. Our procedure is asymptotically valid regardless of the cycle length. We apply our methodology to a set of macroeconomic and financial variables for the U.S. We find evidence of long stochastic cycles in the standard business cycle variables, as well as in credit and house prices. However, we rule out the presence of stochastic cycles in asset market data. Moreover, according to our result, financial cycles, as characterized by credit and house prices, tend to be twice as long as business cycles.

Suggested Citation

  • Natasha Kang, Da & Marmer, Vadim, 2024. "Modeling long cycles," Journal of Econometrics, Elsevier, vol. 242(1).
  • Handle: RePEc:eee:econom:v:242:y:2024:i:1:s0304407624000976
    DOI: 10.1016/j.jeconom.2024.105751
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    More about this item

    Keywords

    Stochastic cycles; Autoregressive processes; Local-to-unity asymptotics; Confidence sets; Business cycle; Financial cycle;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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