Information cascades and the distribution of economic recessions in capitalist economies

7 We consider in this paper the distribution of the cumulative size of recessions in 17 capitalist countries over the period 1871–1994, using data on annual percentage changes in real GDP. 9 A recession is de ned as a year in which GDP growth is negative, and the cumulative change is the change from peak to trough during a recession period. We examine both the whole sample 11 and di erent partitions of the data. The null hypothesis that the size distribution of recessions follows an exponential distribution 13 is never rejected at the conventional level of statistical signi cance, p=0:05. However, there are always a small number of large recessions, no matter how the data is partitioned, which are not 15 well tted by a least-squares regression of the log of size on the rank of size. In other words, in a qualitative sense we see a bimodal distribution of recessions, with an exponential t to the 17 bulk of the data, and a second peak describing a small number of very large recessions. A previously published agent-based economic theory model of the business cycle, calibrated 19 purely on US data, is able with no change in its parameters to generate an exponential distribution of the size of recessions very close to that which is actually observed. In this model, information 21 ows between agents on a completely connected network. c © 2004 Elsevier B.V. All rights reserved. 23