Quotation Sturn, Simon, Epstein, Gerald. 2021. How much should we trust five-year averaging to purge business cycle effects? A reassessment of the finance-growth and capital accumulation-unemployment nexus. Economic Modelling. 96 (C), 242-256.


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Abstract

Averaging data over five years is the canonical approach to purge business cycle effects in cross-country/time-series studies. This neglects that business cycles have been found to last 7–10 years on average, with substantial heterogeneity within and between countries. We assess if five-year averaging leads to insufficiently purged cyclical effects and biased estimates by replicating studies that, based on five-year averaging, find growth-enhancing effects of finance for a panel of 130 countries, and unemployment-reducing effects of capital accumulation for a panel of 20 OECD countries. To test if five–year averaged data is purged from cyclical effects we add output gap measures as controls, which are highly significant and strongly narrow the effects of the key explaining variables, often resulting in insignificant estimates. Too much finance is robustly found to harm growth. Easily implementable alternatives to five–year averaging are discussed.

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Journal article
Journal Economic Modelling
Citation Index SSCI
WU Journalrating 2009 A
WU-Journal-Rating new VW-D
Language English
Title How much should we trust five-year averaging to purge business cycle effects? A reassessment of the finance-growth and capital accumulation-unemployment nexus
Volume 96
Number C
Year 2021
Page from 242
Page to 256
Reviewed? Y
URL https://www.sciencedirect.com/science/article/pii/S0264999320312931?via%3Dihub
DOI https://doi.org/10.1016/j.econmod.2020.12.028
Open Access N
JEL C18, C50, E00, E32, F00, F40, G10, G21, J20, O40

Associations

People
Sturn, Simon (Details)
External
Epstein, Gerald (University of Massachusetts, Amherst, United States/USA)
Organization
Socioeconomics of Work Group AB (Details)
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