Business Cycles and Their Determinants in Afghanistan's Economy: A Time Series Analysis (2008-2020)

Abstract

This study delves into the identification and analysis of business cycles in Afghanistan's economy during the period 2008-2020, along with an exploration of the key factors influencing these cycles. As business cycles are a reflection of a nation's economic performance, their accurate identification is crucial for policymakers. This research aims to extract business cycles by identifying fundamental variables that drive economic fluctuations and to propose appropriate strategies to mitigate these cycles in the Afghan economy. To achieve this objective, the Hodrick-Prescott (HP) filter methodology was employed. The Gross Domestic Product (GDP) was used as a comprehensive measure of economic activity. Subsequently, the HP filter was applied to extract the potential GDP and business cycles. The extracted cycles were then subjected to various econometric tests, including stationarity, cointegration, multicollinearity, autocorrelation, and heteroscedasticity tests. The empirical results indicate that nominal exchange rate, imports, and exports have a positive and significant impact on business cycles, while the consumer price index, real exchange rate, and taxes have negative and significant effects. Furthermore, the findings suggest that Afghanistan's actual GDP exhibits deviations from its potential level, indicating the presence of business cycles. To minimize these fluctuations, appropriate monetary and fiscal policies should be implemented.