Hybrid Specification Model of Business Cycles Theories

Maria R. Ibanez, Marquette University

Abstract

Even when short, fluctuations in aggregate output, employment and inflation may create immense problems in the society. Accordingly, economists try to understand these oscillations between prosperity and recession in full, in order to predict and moderate them. This report presents a hybrid model of three different theories to explain the short-term fluctuations in economic activity, which are commonly known as business cycles.

Using US quarterly data from 1959:Q1 to 2008:Q3. 1959:1, we conclude that the Keynesian, new classical and real business-cycle theories provide different elements that can help explain business cycles. Our analysis suggests that the determinants of business cycles in the United States are the recent past values of the unemployment rate, the Moody’s AAA bond yield, the growth of real expenditures in national defense, the productivity measured as monetary compensation and the growth rate of the nominal M2.