The Asymmetric Business Cycle

The business cycle is a fundamental yet elusive concept in macroeconomics. In this paper, we consider the problem of measuring the business cycle. First, we argue for the output-gap view that the business cycle corresponds to transitory deviations in economic activity away from a permanent, or trend, level. Then we investigate the extent to which a general model-based approach to estimating trend and cycle for the U.S. economy leads to measures of the business cycle that reflect models versus the data. We find empirical support for a nonlinear time series model that produces a business cycle measure with an asymmetric shape across NBER expansion and recession phases. Specifically, this business cycle measure suggests that recessions are periods of relatively large and negative transitory fluctuations in output. However, several close competitors to the nonlinear model produce business cycle measures of widely differing shapes and magnitudes. Given this model-based uncertainty, we construct a model-averaged measure of the business cycle. This measure also displays an asymmetric shape and is closely related to other measures of economic slack such as the unemployment rate and capacity utilization.