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The shape of business cycles: a cross-country analysis of Friedman s plucking theory

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  • Emanuel Kohlscheen
  • Richhild Moessner
  • Daniel Rees

Abstract

We test the international applicability of Friedman s famous plucking theory of the business cycle in 12 advanced economies between 1970 and 2021. We find that in countries where labour markets are flexible (Australia, Canada, United Kingdom and United States), unemployment rates typically return to pre-recession levels, in line with Friedman s theory. Elsewhere, unemployment rates are less cyclical. Output recoveries differ less across countries, but more across episodes: on average, half of the decline in GDP during a recession persists. In terms of sectors, declines in manufacturing are typically fully reversed. In contrast, construction-driven recessions, which are often associated with bursting property price bubbles, tend to be persistent.

Suggested Citation

  • Emanuel Kohlscheen & Richhild Moessner & Daniel Rees, 2023. "The shape of business cycles: a cross-country analysis of Friedman s plucking theory," Papers 2306.01552, arXiv.org.
    • Handle: RePEc:arx:papers:2306.01552
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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