Business Cycle


Economic cycle - Real business cycle theory



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Economic cycle - Real business cycle theory

  • Over the period since the Industrial Revolution, technological progress has had a much larger effect on the economy than any fluctuations in credit or debt, the primary exception being the Great Depression, which caused a multi-year steep economic decline



Economic cycle - Real business cycle theory

  • Carlota Perez blames financial capital for excess speculation, which she claims is likely to occur in the frenzy stage of a new technology, such as the 1998–2000 computer, internet, dot.com mania and bust. Perez also says excess speculation is likely to occur in the mature phase of a technological age.



Economic cycle - Politically based business cycle

  • Alternative Approaches to the Political Business Cycle, Brookings Papers on Economic Activity, p [http://www.jstor.org/pss/2534461 p



Economic cycle - Politically based business cycle

  • (He did not see this theory as applying under fascism, which would use direct force to destroy labor's power.) In recent years, proponents of the electoral business cycle theory have argued that incumbent politicians encourage prosperity before elections in order to ensure re-election – and make the citizens pay for it with recessions afterwards.



America's Great Depression - Part I: Business Cycle Theory

  • 3. Some Alternative Explanations of Depression: A Critique



History of macroeconomic thought - Business cycle theory

  • Beginning with William Stanley Jevons and Clément Juglar in the 1860s, economists attempted to explain the cycles of frequent, violent shifts in economic activity



History of macroeconomic thought - Business cycle theory

  • Their partial equilibrium theories could not capture general equilibrium, where markets interact with each other; in particular, early business cycle theories treated goods markets and financial markets separately



History of macroeconomic thought - Real business cycle theory

  • Instead, Kydland and Prescott built parsimonious models that explained business cycles with changes in technology and productivity



History of macroeconomic thought - Real business cycle theory

  • Real business cycle modelers sought to build macroeconomic models based on microfoundations of Arrow–Debreu model|Arrow–Debreu general equilibrium. RBC models were one of the inspirations for dynamic stochastic general equilibrium (DSGE) models. DSGE models have become a common methodological tool for macroeconomists—even those who disagree with new classical theory.



Economic theory - Business cycle

  • The economics of a depression were the spur for the creation of macroeconomics as a separate discipline field of study. During the Great Depression of the 1930s, John Maynard Keynes authored a book entitled The General Theory of Employment, Interest and Money outlining the key theories of Keynesian economics. Keynes contended that aggregate demand for goods might be insufficient during economic downturns, leading to unnecessarily high unemployment and losses of potential output.



Economic theory - Business cycle

  • He therefore advocated active policy responses by the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle.



Economic theory - Business cycle

  • Thus, a central conclusion of Keynesian economics is that, in some situations, no strong automatic mechanism moves output and employment towards full employment levels. John Hicks' IS/LM model has been the most influential interpretation of The General Theory.



Economic theory - Business cycle

  • Over the years, understanding of the business cycle has branched into various research programs, mostly related to or distinct from Keynesianism



Economic theory - Business cycle

  • lead by Robert Lucas, Jr.|Robert Lucas, and real business cycle theory.Stanley Fischer|Fischer, Stanley (2008)



Economic theory - Business cycle

  • In contrast, the New Keynesian economics|new Keynesian approach retains the rational expectations assumption, however it assumes a variety of market failures



Economic theory - Business cycle

  • Thus, the new classicals assume that prices and wages adjust automatically to attain full employment, whereas the new Keynesians see full employment as being automatically achieved only in the long run, and hence government and central-bank policies are needed because the long run may be very long.



Inverted yield curve - Relationship to the business cycle

  • The slope of the yield curve is one of the most powerful predictors of future economic growth, inflation, and recessions.Arturo Estrella Frederic S



Inverted yield curve - Relationship to the business cycle

  • An inverted yield curve is often a harbinger of recession



Inverted yield curve - Relationship to the business cycle

  • All of the recessions in the US since 1970 (up through 2011) have been preceded by an inverted yield curve (10-year vs 3-month). Over the same time frame, every occurrence of an inverted yield curve has been followed by recession as declared by the National Bureau of Economic Research|NBER business cycle dating committee.



Inverted yield curve - Relationship to the business cycle

  • Estrella has postulated that the yield curve affects the business cycle via the balance sheet of banks.Arturo Estrella, [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1532309 FRB of New York Staff Report No



Freidrich Hayek - The business cycle

  • According to Nicholas Kaldor, Hayek's theory of the time-structure of capital and of the business cycle initially fascinated the academic world and appeared to offer a less facile and superficial understanding of macroeconomics than the Cambridge school's.



Freidrich Hayek - The business cycle

  • Also in 1931, Hayek critiqued Keynes's A Treatise on Money|Treatise on Money (1930) in his Reflections on the pure theory of Mr



Freidrich Hayek - Business cycle critiques

  • Others who responded negatively to Hayek's work on the business cycle included John Hicks, Frank Knight, and Gunnar Myrdal.Bruce Caldwell, Hayek's Challenge: An Intellectual Biography of F



Conjuncture - Spectral analysis of business cycles

  • Korotayev Tsirel also detected shorter business cycles, dating the Kuznets to about 17 years and calling it the third sub-harmonic of the Kondratiev, meaning that there are three Kuznets cycles per Kondratiev.



Conjuncture - Real business cycle theory

  • There were great increases in Productivity improving technologies (historical)|productivity, industrial production and real per capita product throughout period from 1870 to 1890 that included the Long Depression and two other recessions



Jesús Huerta de Soto - Austrian business cycle and full reserve banking

  • Huerta de Soto advocates full-reserve banking, a system in which 100% reserve requirements for banks would prevent any expansion of credit.



Jesús Huerta de Soto - Austrian business cycle and full reserve banking

  • Sechrest rejected Huerta de Soto's description of fractional-reserve depositaries as “legal aberrations” and his characterization of fractional reserve banking as “sin” which must lead to monetary inflation, excessive credit creation, malinvestment, and business cycles



Yield curve - Relationship to the business cycle

  • All the recessions in the US since 1970 (up through 2013) have been preceded by an inverted yield curve (10-year vs 3-month). Over the same time frame, every occurrence of an inverted yield curve has been followed by recession as declared by the National Bureau of Economic Research|NBER business cycle dating committee.



List of cycles - Economic and business cycles

  • Business cycle - Inflation / Recession - Monetary policy - Virtuous circle and vicious circle - Kitchin cycle - Juglar cycle - Kuznets swing



Business cycles

  • The term 'business cycle' (or 'economic cycle' or 'boom–bust cycle') refers to fluctuations in aggregate production, trade and activity over several months or years in a market economy.A. F. Burns and W. C. Mitchell, Measuring business cycles, New York, National Bureau of Economic Research, 1946.



Business cycles

  • The business cycle is the upward and downward movements of levels of gross domestic product (GDP) and refers to the period of expansions and contractions in the level of economic activities (business fluctuations) around its long-term growth trend.Madhani, P. M. (2010). Rebalancing Fixed and Variable Pay in a Sales Organization: A Business Cycle Perspective. Compensation Benefits Review 42(3), pp. 179–189



Business cycles

  • Business cycles are usually measured by considering the growth rate of real versus nominal value (economics)|real gross domestic product. Despite being termed wikt:cycle|cycles, these fluctuations in economic activity can prove unpredictable.



Business cycles - Theory

  • [http://www.economictheories.org/2008/11/over-production-and-under-consumption.html Over Production and Under Consumption], ScarLett, History Of Economic Theory and Thought Prior to that point classical economics had either denied the existence of business cycles, blamed them on external factors, notably war,http://www.thefreemanonline.org/featured/classical-economists-good-or-bad/ or only studied the long term



Business cycles - Theory

  • Sismondi's theory of periodic crises was developed into a theory of alternating cycles by Charles Dunoyer,[http://hope.dukejournals.org/cgi/content/abstract/41/2/271 Charles Dunoyer and the Emergence of the Idea of an Economic Cycle], Rabah Benkemoune, History of Political Economy 2009 41(2):271–295; and similar theories, showing signs of influence by Sismondi, were developed by Johann Karl Rodbertus



Business cycles - Classification by periods

  • In 1860 French economist Clement Juglar first identified economic cycles 7 to 11 years long, although he cautiously did not claim any rigid regularity.



Business cycles - Classification by periods

  • M. W. Lee, Economic fluctuations. Homewood, IL, Richard D. Irwin, 1955 Later, economist Joseph Schumpeter (1883–1950) argued that a Juglar Cycle has four stages:



Business cycles - Classification by periods

  • # expansion (increase in production and prices, low interest-rates)



Business cycles - Classification by periods

  • # crisis (stock exchanges crash and multiple bankruptcies of firms occur)



Business cycles - Classification by periods

  • # recession (drops in prices and in output, high interest-rates)



Business cycles - Classification by periods

  • # recovery (stocks recover because of the fall in prices and incomes)



Business cycles - Classification by periods

  • Schumpeter's Juglar model associates recovery and prosperity with increases in productivity, consumer confidence, aggregate demand, and prices.



Business cycles - Classification by periods

  • * the Clement Juglar|Juglar fixed investment|fixed-investment cycle of 7 to 11 years (often identified as the business cycle)



Business cycles - Classification by periods

  • * the Kuznets swing|Kuznets infrastructural investment cycle of 15 to 25 years (after Simon Kuznets – also called building cycle)



Business cycles - Classification by periods

  • Interest in the different typologies of cycles has waned since the development of modern macroeconomics, which gives little support to the idea of regular periodic cycles.



Business cycles - Occurrence

  • This was particularly true during the Golden Age of Capitalism (1945/50–1970s), and the period 1945–2008 did not experience a global downturn until the Late-2000s recession.http://www.ici.org/pdf/per02-02.pdf Stock Market Cycles 1942–1995 Economic stabilization policy using fiscal policy and monetary policy appeared to have dampened the worst excesses of business cycles, and automatic stabilization due to the aspects of the government's budget also helped mitigate the cycle even without conscious action by policy-makers.



Business cycles - Occurrence

  • In this period, the economic cycle – at least the problem of depressions – was twice declared dead



Business cycles - Occurrence

  • Various regions have experienced prolonged depression (economics)|depressions, most dramatically the economic crisis in former Eastern Bloc countries following the end of the Soviet Union in 1991. For several of these countries the period 1989–2010 has been an ongoing depression, with real income still lower than in 1989. This has been attributed not to a cyclical pattern, but to a mismanaged transition from command economies to market economies.



Business cycles - Identifying

  • In 1946, economists Arthur F. Burns and Wesley Clair Mitchell|Wesley C. Mitchell provided the now standard definition of business cycles in their book Measuring Business Cycles:A. F. Burns and W. C. Mitchell, Measuring business cycles, New York, National Bureau of Economic Research, 1946.



Business cycles - Identifying

  • According to A. F. Burns:A. F. Burns, Introduction. In: Wesley C. Mitchell, What happens during business cycles: A progress report. New York, National Bureau of Economic Research, 1951



Business cycles - Explanations

  • If the economy is operating with less than full employment, i.e., with high unemployment, Keynesian theory states that monetary policy and fiscal policy can have a positive role to play in smoothing the fluctuations of the business cycle.



Business cycles - Explanations

  • There are a number of alternative heterodox economic theories of business cycles, largely associated with particular schools of economic thought|schools or theorists. There are also some divisions and alternative theories within mainstream economics, notably real business cycle theory and credit-based explanations such as debt deflation and the financial instability hypothesis.



Business cycles - Exogenous vs. endogenous

  • Mainstream economists working in the neoclassical economics|neoclassical tradition, as opposed to the Keynesian tradition, have usually viewed the departures of the harmonic working of the market economy as due to exogenous influences, such as the State or its regulations, labor unions, business monopolies, or shocks due to technology or natural causes.



Business cycles - Exogenous vs. endogenous

  • Contrarily, in the heterodox tradition of Jean Charles Léonard de Sismondi, Clement Juglar, and Crisis theory|Marx the recurrent upturns and downturns of the market system are an endogenous characteristic of it.Mary S. Morgan, The History of Econometric Ideas, Cambridge University Press, 1991.



Business cycles - Keynesian

  • In the Keynesian tradition, Richard M



Business cycles - Credit/debt cycle

  • Post-Keynesian economics|Post-Keynesian economist Hyman Minsky has proposed an explanation of cycles founded on fluctuations in credit, interest rates and financial frailty, called the Financial Instability Hypothesis



Business cycles - Marxian economics

  • For Marx the economy based on production of commodities to be sold in the market is intrinsically prone to Crisis (Marxian)|crisis



Business cycles - Marxian economics

  • Some Marxist authors such as Rosa Luxemburg viewed the lack of purchasing power of workers as a cause of a tendency of supply to be larger than demand, creating crisis, in a model that has similarities with the Keynesian one



Business cycles - Marxian economics

  • Goodwin formalised a Marxist model of business cycles, known as the Goodwin Model in which recession was caused by increased bargaining power of workers (a result of high employment in boom periods) pushing up the wage share of national income, suppressing profits and leading to a breakdown in capital accumulation



Business cycles - Austrian School

  • Economists of the Austrian School argue that business cycles are caused by excessive issuance of credit by banks in fractional reserve banking systems



Business cycles - Austrian School

  • Adherents of the Austrian School, such as the historian Thomas Woods, argue that these earlier financial crises were prompted by government and bankers' efforts to expand credit despite restraints imposed by the prevailing gold standard, and are thus consistent with Austrian Business Cycle Theory.



Business cycles - Yield curve

  • Estrella has postulated that the yield curve affects the business cycle via the balance sheet of banks.Arturo Estrella, [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1532309 FRB of New York Staff Report No



Business cycles - Georgism



Business cycles - Georgism

  • Because housing and commercial real estate provide collateral for a large portion of lending, there is a tendency for real estate prices to rise faster than the rate of inflation in business cycle upswings.



Business cycles - Mitigating an economic downturn

  • Since the 1940s, following the Keynesian revolution, most governments of developed nations have seen the mitigation of the business cycle as part of the responsibility of government, under the rubric of stabilization policy.



Business cycles - Mitigating an economic downturn

  • By contrast, some economists, notably New classical economics|New classical economist Robert Lucas, Jr.|Robert Lucas, argue that the welfare cost of business cycles are very small to negligible, and that governments should focus on long-term growth instead of stabilization.



Business cycles - Mitigating an economic downturn

  • Karl Marx claimed that recurrent Crises (economic)|business cycle crises were an inevitable result of the operations of the capitalism|capitalistic system



Business cycles - Mitigating an economic downturn

  • Additionally, since the 1960s Neoclassical economics|neoclassical economists have played down the ability of Keynesian policies to manage an economy



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