Academic journal article International Journal of Business and Society

An Empirical Assessment of Business Cycle Asymmetries: Evidence from Malaysia

Academic journal article International Journal of Business and Society

An Empirical Assessment of Business Cycle Asymmetries: Evidence from Malaysia

Article excerpt

ABSTRACT

Asymmetry is a key feature to understand the different behavior of expansions and recessions, and it provides a stylized fact that business cycle models should help to explain. Furthermore, the types of asymmetries provide guidance about underlying economic mechanism. In this paper, we test for three types of asymmetry of business cycle: steepness, deepness and sharpness, by using the parametric tests of Clements and Krolzig (2003), based on Markov-Switching autoregressive models in the real GDP of Malaysia for the period from 1975Q1 to 2006Q4. This paper also uses three different approaches to remove trend component of GDP to investigate the sensitivity of the findings of asymmetries to the method of trend eliminations. Finally, for comparison, the non-parametric test of Randles et al. (1980) is also employed. We find strong evidence of steep asymmetry but not deep sharp asymmetry for Malaysia which is in contrast to the findings of Khong and Lau (2007) and Eng and Wang (2008). These findings have important implications for econometric modeling and policy making.

Keywords: Markov Switching Models, Depth, Steepness, Sharpness, Business Cycle.

I. INTRODUCTION

Interest in the cyclical properties of macroeconomic variables has a long history in macroeconomic research. Studies questioned whether the variables exhibit asymmetries over the different phases of business cycle. Asymmetry cycle is one in which some phases of the cycles are different from the mirror image of the opposite phases. It provides a stylized fact that business cycle models should help to explain (Belaire-Franch and Contreras, 2003)1. The need to detect and model business cycle asymmetry in business is important for economic theory, empirical work and policy analysis. Asymmetries indicate that policy conclusions from traditional linear models will be misleading since linear models cannot generate asymmetric fluctuations (See Neftçi, 1984; Beaudry and Koop, 1993; Sichel, 1993; Verbrugge, 1998; Boldin, 1999 and Rothman, 1998 among others). Moreover, Kiani and Bidarkota (2004) argue that non-linearities invalidate measure of persistence of monetary policies and other shocks on output that are based on linear models. Thus, policy makers should worry about asymmetries even if econometric model builders are not concerned with them (see Boldin, 1999). Therefore, the purpose of this paper is to examine the asymmetric properties of business cycle fluctuations in Malaysia for the period from 1975Q1 to 2006Q4.

Since the pioneering work of Neftçi (1984) documents that the unemployment rate displays an asymmetric behavior over various phases of the business cycle, there have been ample evidence of asymmetry in the cyclical fluctuations of U.S. unemployment and industrial production; however, the evidence of asymmetry is weaker or does not exist (Falk, 1986; Delong and Summers, 1986) when real GDP is used as measure of the U. S. business cycle instead of unemployment or industry production2.

Recently, Razzak (2001) uses the Triples test of Randles et al. (1980) to detect asymmetries in four major economies (U.S., U.K., Japan and Germany) and two small open economies Australia and New Zealand. He does not detect any asymmetry in the distribution of the US output, which is consistent with previous empirical findings. However, significant asymmetries are found in the rest of the countries. Franch and Contreras (2003) revisited Razzak's work by applying the parametric tests of Clements and Krolzig (2003) to test three types of asymmetry: steepness, deepness and sharpness. Comparing the triples test results, the parametric tests provide stronger evidence of international business cycle asymmetries. More recently, Chen (2005) also adopts Clements and Krolzig's (2003) parametric tests to determine the asymmetric properties of Taiwan business cycle fluctuations. They find that although the non-deep property is overwhelmingly applicable to Taiwan's business cycle, it strongly reject non-steepness hypothesis. …

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