Examining Nonlinear Business Cycle Effects on U.S. Unemployment and Capacity Utilization

Abstract

This thesis develops nonlinear smooth transition autoregressive (STAR) models to capture the business cycle dynamics of the U.S. rates of unemployment and capacity utilization. This choice of model is motivated by a general inquiry as to whether the two series behave in a similar fashion during periods of recession, expansion, or somewhere in between. While STAR models for unemployment have been developed by several authors, capacity utilization has not (to our knowledge) been analyzed in the same context. Our results for unemployment are in accord with those of previous studies: namely, that unemployment follows essentially two business cycle regimes of expansion and contraction. By contrast, our results for capacity utilization indicate that it follows a three-regime process: those of recession, high growth, and normal growth. The model suggests that dynamic adjustments are roughly equal for the first and third regimes, but different for the second.