The durations of recession and prosperity: does their distribution follow a power or an exponential law?

TL;DR

This paper investigates whether the durations of economic recessions and prosperity follow power or exponential distributions, finding evidence favoring power laws but acknowledging unresolved questions and emphasizing universal features.

Contribution

It provides an analysis of GDP data to compare power and exponential laws for economic cycle durations, highlighting the prevalence of power law behavior in both recessions and prosperity periods.

Findings

Recession durations are better described by a power law.

Prosperity durations also follow a power law.

Universal features exist between recession and prosperity durations.

Abstract

Following findings by Ormerod and Mounfield, Wright rises the problem whether a power or an exponential law describes the distribution of occurrences of economic recession periods. In order to clarify the controversy a different set of GDP data is hereby examined. The conclusion about a power law distribution of recession periods seems better though the matter is not entirely settled. The case of prosperity duration is also studied and is found to follow a power law. Universal but also non universal features between recession and prosperity cases are emphasized. Considering that the economy is basically a bistable (recession/prosperity) system we may derive a characteristic (de)stabilisation time.