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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

Major views about the business cycle are tested by using NIPA data of the US economy for the years 1929-2013. Direct acyclic graphs (DAGs) are used for identification purposes, i.e., as tool to elucidate causal issues. Re-sults 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) both business investment and profits have negative effects on government spending which consequently appears as an endogenous rather than as an exogenous variable. Regularities identified in the data are sufficient to generate the cycle. Considering the results, the “regularity” of the business cycle, and the fact that after growing between 2008 and 2012, profits stagnated in 2013 and declined in 2014, it can be concluded with reasonable confidence that a recession will occur in the next few years.

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