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Business Cycles

Paper Session

Friday, Jan. 3, 2020 8:00 AM - 10:00 AM (PDT)

Marriott Marquis, Solana
Hosted By: American Economic Association
  • Chair: Emily Marshall, Dickinson College

Business Cycle Narratives

Vegard Høghaug Larsen
Norges Bank
Leif Anders Thorsrud
BI Norwegian Business School


Research about narratives’ role in economics is scarce, while real word experience and research in other sciences suggest they matter a lot. This article proposes a view and methodology for quantifying the epidemiology of media narratives relevant to business cycles in the US, Japan, and Europe. We do so by first constructing quantitative measures of narratives based on the news topics the media writes about. We then estimate daily business cycle indexes using this type of data, derive virality indexes capturing the extent to which narratives relevant for business cycles go viral, and finally use so called “Graphical Granger causality” modeling to cast light on cross-country spillovers and whether or not narratives carry news or noise. Our results highlight the informativeness of narratives for describing economic fluctuations, have a clear practical relevance for high-frequency business cycle monitoring, and suggest that narratives capture more than the market’s animal spirits.

Determinants of the Credit Cycle: A Flow Analysis of the Extensive Margin

Vincenzo Cuciniello
Bank of Italy


We use monthly data on individual loans from the Italian Credit Register over the period from 1997 to 2019 and show that bank credit expansions in the non-financial private sector are mostly explained by variations in the extensive margin calculated either in credit flows or headcount of new borrowers. We then build on a flow approach to decompose changes in the net creation of borrowers into gross flows across three states: (i) borrowers, (ii) applicants and (iii) others (neither debtors nor applicants). The paper investigates the macroeconomic dimension of these gross flows and documents three key cyclical facts. First, entries in the credit market by new obligors (`inflows') account for the bulk of volatility in the net creation of borrowers. Second, the volatility of borrower inflows is two times as large as the volatility of obligors exiting from the credit market (`outflows'). Third, borrower inflows are highly pro-cyclical, lead the economic cycle, and their fluctuations are mainly driven by the probability of getting a loan from new banks. We read these results in light of the macrofinance literature on search frictions and on competition with lender-lender informational asymmetries. Overall, our findings support theoretical predictions of these models, but search frictions seem to play a major role in shaping movements along the extensive margin.

Returns to Entrepreneurial Experience over the Business Cycle

Erin McGuire
Scheller College of Business, Georgia Institute of Technology


In this paper, I explore business cycle-related dynamics in the returns to entrepreneurial experience. Using time-series geographic variation in economic conditions, I disentangle the effects of shocks to aggregate demand, alternative employment options, and credit availability on differences in firm exit rates between serial and novice entrepreneurs. Weibull survival model estimates indicate that serial entrepreneurs are more likely to endure negative shocks to aggregate income and credit availability, but are relatively more likely to go out of business as slack increases in the labor market. In the second part of the paper, I provide evidence that these dynamics are driven by differences in access to financial resources and business strategies.

Sentimental Business Cycles and the Protracted Great Recession

Christos Andreas Makridis
Massachusetts Institute of Technology


Using newly licensed individual-level data from Gallup between 2008 and 2017, this paper provides microeconomic evidence that sentiments about economic activity played an important role in amplifying and propagating the Great Recession. First, after controlling for aggregate shocks, a 1pp rise in county employment and housing price growth is associated with a 0.30sd and 0.67sd rise in perceptions about the current state of the economy and a 0.12pp and 0.27pp rise in perceptions the economy is improving. Second, exploiting plausibly exogenous variation in the 2016 Presidential election, consumption of non-durable goods grew by 4.2% with a larger 10-12% increase among conservatives. The causal effect of sentiment on consumption is robust to three separate instrumental variables strategies: a state Bartik-like measure of gasoline price shocks, county fluctuations in daily temperature, and exposure to different housing price shocks through social networks. A back-of-the-envelope calculation suggests that the decline in sentiment can account for 34-68% of the decline in consumption during the Great Recession and an additional 14-43 months of delayed recovery.

Displacement and the Rise in Top Wealth Inequality

Matthieu Gomez
Columbia University


The growth of top wealth shares can be decomposed into two terms: (i) a within term, driven by the average wealth growth of households in top percentiles relative to the economy and (ii) a displacement term, driven by all higher-order moments of their wealth growth. I propose an accounting framework to map this decomposition to the data. I find that the displacement term accounts for more than half of the rise in top wealth shares in the United States since 1983. I examine the importance of this finding for the relationship between wealth inequality and economic growth, as well as for wealth mobility.
JEL Classifications
  • E3 - Prices, Business Fluctuations, and Cycles