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arXiv · 2306.01552

The shape of business cycles: a cross-country analysis of Friedman s plucking theory

Emanuel Kohlscheen·Richhild Moessner·Daniel Rees
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Abstract

We test the international applicability of Friedman s famous plucking theory of the business cycle in 12 advanced economies between 1970 and 2021. We find that in countries where labour markets are flexible (Australia, Canada, United Kingdom and United States), unemployment rates typically return to pre-recession levels, in line with Friedman s theory. Elsewhere, unemployment rates are less cyclical. Output recoveries differ less across countries, but more across episodes: on average, half of the decline in GDP during a recession persists. In terms of sectors, declines in manufacturing are typically fully reversed. In contrast, construction-driven recessions, which are often associated with bursting property price bubbles, tend to be persistent.

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Emanuel Kohlscheen, Richhild Moessner, Daniel Rees. 2023-06-02. The shape of business cycles: a cross-country analysis of Friedman s plucking theory. https://arxiv.org/abs/2306.01552

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