Paper: arXiv 2403.04104

Authors: Bo Li

Abstract

Empirical business cycle studies using cross-country data usually cannot achieve causal relationships while within-country studies mostly focus on the bust period. We provide the first causal investigation into the boom period of the 1999-2010 U.S. cross-metropolitan business cycle. Using a novel research design, we show that credit expansion in private-label mortgages causes a differentially stronger boom (2000-2006) and bust (2007-2010) cycle in the house-related industries in the high net-export-growth areas. Most importantly, our unique research design enables us to perform the most comprehensive tests on theories (hypotheses) regarding the business cycle. We show that the following theories (hypotheses) cannot explain the cause of the 1999-2010 U.S. business cycle: the speculative euphoria hypothesis, the real business cycle theory, the collateral-driven credit cycle theory, the business uncertainty theory, and the extrapolative expectation theory.

Complexity vs Empirical Score

  • Math Complexity: 3.0/10
  • Empirical Rigor: 8.5/10
  • Quadrant: Street Traders — practical and empirical, lighter on theory

Why this score: The paper relies heavily on empirical causal inference and cross-metropolitan data rather than complex mathematical modeling. It offers a novel identification strategy to test several major macroeconomic hypotheses simultaneously, demonstrating strong empirical rigor and high relevance to real-world business cycle dynamics.

Research Flowchart

  flowchart TD
    A[Research Goal: Causal driver of 1999-2010 US business cycle & testing theories] --> B[Data Inputs: US cross-metropolitan data 1999-2010 & Private-Label Mortgages]
    B --> C[Methodology: Novel cross-sectional causal design analyzing high net-export-growth areas]
    C --> D[Analysis: Quantify credit expansion impact on house-related industries in Boom vs. Bust]
    D --> E[Outcome 1: Private-label mortgage expansion caused stronger boom 00-06 & bust 07-10]
    D --> F[Outcome 2: Rejected RBC, Euphoria, Collateral, Uncertainty, & Extrapolative theories]