Volume 7, Issue 1

We study how entry and exit decisions of a monopolist are affected by business cycle conditions. We model the business cycle as a two-state Markov process, and assume that the demand curve faced by the monopolist evolves differently in the two states of the economy. We explore conditions under which the monopolist would enter or exit, either in a boom or a recession.

Within a flexible parametric regression framework (Hamilton, 2001) we provide further evidence on the existence of a nonlinear component in the quarterly growth rate of the US real GNP. We implement a battery of new tests for neglected nonlinearity based on the theory of random fields (Dahl and Gonzalez-Rivera, 2003). We find that the nonlinear component is driven by the fifth lag of the growth rate. We show that our model is superior to linear and nonlinear parametric specifications because it produces a business cycle that when dissected with the BBQ algorithm mimics very faithfully the characteristics of the actual US business cycle. On understanding the relevance of the fifth lag, we find that the nonparametrically estimated conditional mean supports parametric specifications that allow for three phases in the business cycle: rapid linear contractions, aggressive short-lived convex early expansions, and moderate/slow relatively long concave late expansions.

This paper makes two contributions to the literature on terrorism: 1) It presents a model that explains the cyclical characteristics of terrorist attacks, and 2) It improves on the existing theoretical cyclical models since it takes explicitly into account terrorists’ motivations and decision-making. The model assumes that the government acts as leader and terrorists as followers. Terrorists maximize terrorist acts over time constrained by their budget constraint, which yields a time path for terrorist activities. Then the government maximizes national security by taking the time path of terrorist activities and investments in enforcement as constraints. The model shows that permanent cyclical paths for enforcement, terrorist activities, terrorist capital and national security may arise as an optimal solution.

This paper examines conditional and unconditional asymmetries in the Nelson and Plosser dataset by using two tests recently proposed by Jushan Bai and Serena Ng. In line with previous research, the results show that asymmetry is not a proper characterization of most macroeconomic series, although labor variables like employment and the unemployment rate present unconditional asymmetries.