What Causes Business Cycles?
The methods are spectral analysis and factor analysis. Using the random matrix theory, we show that two largest eigenvalues are significant, and identify the first dominant factor as the aggregate demand, and the second factor as inventory adjustment. They cannot be reasonably interpreted as technological shocks. We demonstrate that in terms of two dominant factors, shipments lead production by four months. Furthermore, out-of-sample test demonstrates that the model stands the 2008-09 recession. Because a fall of output during 2008-09 was caused by an exogenous drop in exports, it provides another justification for identifying the first dominant factor as the aggregate demand. All the findings suggest that the major cause of business cycles is real demand shocks. New Economics Papers: this item is included in nep-bec and nep-mac Date: 2009-12 View list of references Downloads: (external link) http://arxiv.org/abs/0912.0857 Abstract (text/html) http://arxiv.org/pdf/0912.0857 Latest vers
