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Growth and Business Cycle Research Group

Discussion papers 2003

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Andreou, E., Pelloni, A., Sensier,, M. (2003). ‘The effect of nominal shock uncertainty on output growth’, Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 40.

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This paper tests some empirical implications of a theoretical model which proposes that the relationship between growth and its uncertainty depends fundamentally on whether the stochastic shocks causing fluctuations are real or nominal and on the presence of nominal rigidities in the economy. Shock uncertainty associated with cyclical variation is captured by a dynamic conditional variance model that estimates the time-varying, unpredictable volatility of nominal and real shocks and their effects on growth. In the context of a bivariate GARCH-in-Mean model we test the empirical conditional mean and variance relationships of nominal money and production growth rates in the G7 countries. We find that growth uncertainty has an insignificant effect but nominal money shock uncertainty exerts a negative and significant influence on growth for some of the G7. This is considered as supportive empirical evidence of the theoretical model predictions particularly on the link between nominal shock uncertainty and output growth. Another implication of the theoretical model that gains empirical support is that an increase in the average rate of money growth has a positive effect on the average output growth rate.


Osborn, D. R., Sensier, M., van Dijk, D., (2003). ‘Predicting Growth Cycle Regimes for European Countries’, Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 39.

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This paper examines the roles of domestic and international variables in predicting expansion and recession regimes of the growth rate cycle for Germany, France, Italy and the UK over the period 1972 to 2003, using a range of real and financial variables as leading indicators. The output gap, stock market prices and interest rates are found to be the most important variables in the domestic models. Consideration of international variables leads to prominent roles for the composite leading indicators for Europe and the US, and sometimes for US or German interest rates. Both the domestic output gap and the international composite leading indicators typically play negative roles for the probability of a growth cycle expansion, so that relatively extreme values of these may be helpful in predicting regime changes. The models for all four countries predict the post-sample recessions which start between 1999 and 2001.


Osborn, D. R., Matas-Mir, A., (2003). ‘The Extent of Seasonal/Business Cycle Interactions in European Industrial Production’, Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 38.

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Recent literature has uncovered evidence that the seasonal pattern in industrial production changes over the business cycle, with seasonality being less pronounced in periods of high growth than in the low growth (or recession) business cycle phase. Matas-Mir and Osborn (2002) examine this effect using monthly data for various OECD countries, showing that the change in the seasonal pattern is typically concentrated in the summer months. The present paper extends this analysis in a specifically European context, by presenting measures of the extent of seasonal/business cycle interactions for industrial production series from European countries. The analysis is undertaken using a nonlinear threshold model that allows the overall mean and seasonal characteristics to change with the regime. The extent of seasonality in each regime is represented as the average absolute deviation of the steady state growth in each month from the overall steady state mean growth in that regime, with seasonality considered both over twelve months and over the summer months only. Seasonal/business cycle interaction is then measured in two ways, namely as the difference and the ratio of the regime- dependent seasonality, again separately for all months and for the summer. The results reinforce previous findings of reduced seasonality in higher growth periods, with the seasonal pattern being moderated by around 20 percent (both over the year and in the summer months) in some European countries.


Pérez, P.J., Osborn, D. R., Artis, M. (2003). ‘The International Business Cycle in a Changing World: Volatility and the Propagation of Shocks’,Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 37.

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This paper examines the changing relationships between the G-7 countries through VAR models for the quarterly growth rates, estimated both over sub-periods and using a rolling data window. Six trivariate models are estimated, all of which include the US and a European (E15) aggregate. In relative terms, the conditional volatility of E15 growth has declined more since 1980 than the well-documented decline for the US. The propagation of shocks has also changed, with the volatility and propagation effects separated by applying shocks of pre-1980 magnitude to VARs estimated over various periods. Rolling estimation reveals that E15 has a steadily increasing impact on the US economy over time, while the effects of the US on Europe have been largest during the 1970s and the late 1990s.


Sensier, M., van Dijk, D., (2003). ‘Testing for Volatility Changes in US Macroeconomic Time Series’, Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 36.

Download PDF (655KB). Published in Review of Economics and Statistics, 2004, vol. 86(3), pp. 833-839. 

We test for a change in the volatility of 214 US macroeconomic time series over the period 1959-1999.  We find that about 80% of these series have experienced a break in unconditional volatility during this period.  Even though more than half of the series experienced a break in conditional mean, most of the reduction in volatility appears to be due to changes in conditional volatility. Our results are robust to controlling for business cycle nonlinearity in both mean and variance. Volatility changes are more appropriately characterized as an instantaneous break rather than gradual change. Nominal variables such as inflation and interest rates experienced multiple volatility breaks and witnessed temporary increases in volatility during the 1970s. Based upon this evidence, we conclude that the increased stability of economic fluctuations in a wide-spread phenomenon.


Blackburn, K., Bose, N., Haque M.E., (2003). ‘The Incidence and Persistence of Corruption in Economic Development’, Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 34.

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Economic development and bureaucratic corruption are determined jointly in a dynamic general equilibrium model of growth, bribery and tax evasion. Corruption arises from the incentives of public and private agents to conspire in the concealment of information from the government. These incentives depend on aggregate economic activity which, in turn, depends on the incidence of corruption. The model produces multiple development regimes, transition between which may or may not occur. In accordance with recent empirical evidence, the relationship between corruption and development is predicted to be negative.


Capasso, C., (2003). ‘Stock Market Development and Economic Growth:A matter of informational problems’, Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 32.

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This paper aims to provide further insights into the linkages between stock market development and economic growth within the context of a dynamic general equilibrium framework of informational asymmetries, endogenous contract choice and capital accumulation. When firms have access to different projects with different unobservable rate of returns, the market valuation of those projects is an "average" value reflecting the expected return across all projects. Consequently, as in a typical lemon's market, higher return projects are penalised since they attract lower than fair prices. This informational cost, or dilution cost, depends on the degree of informational asymmetry in the market, as well as on the type of financial contract issued by the firm to finance those projects. Typically, an equity contract involves higher dilution costs than a debt contract, which, in turn, might involve other forms of costs, such as bankruptcy costs. The combinations of these costs determines the prevailing financial contract in the market. On this grounds, we develop a model in which, as capital accumulates, the level of information asymmetry decreases, and, consequently, the development of stock market is the result of a change in the optimal financial choice of firms which switch from debt financing to a less costly - lower dilution costs - equity financing.


Haque, M.E., Kim, D.H., (2003). ‘Public Investment in Transportation and Communication and Growth: A Dynamic Panel Approach’, Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 31.

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This paper investigates the relationship between public investment in transportation and communication and economic growth using traditional instrumental estimation and a mixed fixed and random coefficient approach in the context of a dynamic panel framework. We find that there is a dynamic effect of public investment in transportation and communication on economic growth and its impact is positive. In comparison with earlier studies, our estimated coefficients are somewhat lower. However, for the reverse causal relationship proposed by the investment acceleration hypothesis, we find that there is significant heterogeneity across countries and our empirical study does not support the presence of reverse causality.


Bose, N., Haque, M.E., Osborn, D. R., (2003). ‘Public Expenditure and Economic Growth: A disaggregated Analysis for Developing Countries’, Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 30.

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This paper examines the growth effects of government expenditure for a panel of thirty developing countries over the decades of the 1970s and 1980s, with a particular focus on sectoral expenditures. Our methodology improves on previous research on this topic by explicitly recognising the role of the government budget constraint and the possible biases arising from omitted variables. Our primary results are twofold. Firstly, the share of government capital expenditure in GDP is positively and significantly correlated with economic growth, but current expenditure is insignificant. Secondly, at the sectoral level, government investment and total expenditures in education are the only outlays that are significantly associated with growth once the budget constraint and omitted variables are taken into consideration. Therefore, we conclude that education is the key to growth for developing countries.


Pérez, P.J., Osborn, D. R., Sensier, M., (2003). ‘Business Cycle Affiliations in the Context of European Integration’, Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 29.

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We study affiliations for the countries of the European Economic and Monetary Union (EMU) with Germany and the US, using various business cycle measures derived from quarterly real GDP. These measures are Hodrick-Prescott and Baxter-King filtered series, together with annual and quarterly growth rates. By using rolling contemporaneous and maximum (over a short lead/lag interval) correlations, we document increasing correlations of EMU countries with Germany, with these typically being largest during the 1990s. We also document a strong leading role for the US in relation to these countries in the period since 1993, thereby correcting the fallacy that the European business cycle was disjoint from the US for most of the 1990s.


Issa,H., (2003). ‘Human capital, Demographic Transition and Economic Growth’, Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 28.

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This paper extends the literature on economic growth and demographic change by developing a neo-classical model of endogenous growth in which both economic and demographic outcomes are jointly determined. The key point in this model is the endogenisation of child mortality rate by linking it to parents' human capital, defined in a broad sense to include both education and health. The numerical simulation of this model confirms that as economic development takes place there will be a decline in child mortality rate followed by similar trend in fertility rate, hence, population growth rate.


Aslanidis, N., Osborn, D. R., Sensier, M., (2003). ‘Explaining movements in UK stock prices: How important is the US market?’, Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 27.

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This paper provides evidence on the causes of movements in monthly UK stock prices, examining the role of macroeconomic and financial variables in a nonlinear framework. We allow for time-varying effects through the use of smooth transition models. We find that past changes in the dividend yield are an important transition variable, with current US stock market price changes providing a second nonlinear influence. This model explains the declines in the UK market since 2000, whereas a competing model excluding current US prices does not. The conclusion is that the principal explanation of recent declines in the UK lies in the nonlinear influence of declines in the US, and not the domestic economic environment.


Matas-Mir, A.,  Osborn, D. R., (2003). ‘Seasonal Adjustment and the Detection of Business Cycle Phases’, Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 26.

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To date, there has been little investigation of the impact of seasonal adjustment on the detection of business cycle expansion and recession regimes. We study this question both analytically and through Monte Carlo simulations. Analytically, we view the occurrence of a single business cycle regime as a structural break that is later reversed, showing that the effect of the linear symmetric X-11 filter differs with the duration of the regime. Through the use of Markov switching models for regime identification, the simulation analysis shows that seasonal adjustment has desirable properties in clarifying the true regime when this is well underway, but it distorts regime inference around turning points, with this being especially marked after the end of recessions and when the one-sided X-11 filter is employed.


Blackburn, K., Galindev, R., (2003). ‘Growth, volatility and learning’, Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 25.

Download PDF (265KB). Published in Economic Letters, 2003, vol.79, pp.417-421.

This paper presents a simple stochastic growth model in which productivity improvements are the result of both internal (deliberate) and external (serendipitous) learning behaviour. The model is used to illustrate how these different mechanisms of endogenous technological change can lead to different implications for the correlation between output growth and output variability.