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Profits encourage investment, investment dampens profits, government spending does not prime the pump — A DAG investigation of business-cycle dynamics

Tapia, Jose (2015): Profits encourage investment, investment dampens profits, government spending does not prime the pump — A DAG investigation of business-cycle dynamics.

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Abstract

NIPA data of the US economy for the years 1929-2013 are used to test major views about the business cycle. Direct acyclic graphs (DAGs) are used for identification purposes, i.e., as tool to elucidate causal issues. Results show that (a) investment is not autonomous, as it is stimulated by profits and consumption, and damped by government spending; (b) profits are reduced by past investment; (c) government spending appears as an endogenous variable, as both business investment and profits have negative effects on it. Regularities identified in the data are sufficient to generate the cycle. Considering the results, the “regularity” of the business cycle, and the fact that profits stagnated in 2013 and declined in 2014 after growing between 2008 and 2012, it can be concluded with reasonable confidence that a recession will occur in the next few years.

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