Business cycle asymmetries and the financial propagation mechanism
This dissertation presents the results of an investigation into the nature and causes of aggregate economic fluctuations. It comprises four essays, analysing the following topics: - Chapter 1 investigates the main features of business cycles in Italy in historical perspective (1861-1995). The essay reconsiders the assumption that business cycles are all alike, complementing the search for time domain regularities with a classical analysis of individual cycles and phases. It also provides formal tests, for ten industrialized countries, of various aspects of the representative cycle hypothesis. The results show that there is substantial heterogeneity in individual cycles and phases in terms of duration, amplitude, and co-movements between variables, and that such heterogeneity is generally statistically significant. - Chapter 2 reports the results of an empirical investigation of business cycle asymmetries in the Italian economy. Macroeconomic time series, both long run annual and post-war quarterly, are investigated to test for the presence of non-linearity and cyclical asymmetry. The dynamics of recessions and expansions are then modelled with threshold autoregressive and Markov-switching models. The essay shows that allowing for two regimes can be sufficient to account for the finding of neglected non-linearity, and concludes that business cycle asymmetries provide both an intuitive economic interpretation and a parsimonious representation of non-linearities in macroeconomic time series. - Chapter 3 applies models of explicit distribution dynamics to company account data for a panel of U.S. manufacturing firms, to investigate the dynamics of the cross-section distribution of firms' financial positions and its interactions with aggregate activity. The dynamics of different parts of the leverage distribution are found to contain significant predictive information for aggregate investment growth. The distribution dynamics reveal substantial intra-distribution mobility, although there is little evidence of significant interactions with aggregate economic activity. Intra-distribution mobility is higher for small than for large firms, and displays asymmetric patterns across business cycle phases. - Chapter 4 investigates the dynamic interaction between financial conditions and investment decisions by estimating and testing vector autoregressions on company account panel data for U.S. manufacturing firms. The results show that indicators of liquidity and solvency contain significant predictive information for investment at firm level. There is also evidence of both sectional and time heterogeneity: the role played by financial factors is significantly more important for highly leveraged than for low-debt firms; capital market frictions are shown to have asymmetric effects, displaying a larger impact in contractions than in expansions. Overall, the evidence supports the hypothesis that capital market imperfections have an important role in explaining aggregate cyclical dynamics.