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the causes of american business cycle Free essay! Download now

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the causes of american business cycle

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A survey of business cycle causes over an entire century runs into several problems, of which three seem noteworthy. paper proceeds by discussing each of these problems in turn, then turning to the data, and finally drawing some conclusions from the preceding efforts

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THE CAUSES OF AMERICAN BUSINESS CYCLES:
AN ESSAY IN ECONOMIC HISTORIOGRAPHY
Sadia chaudhary
This paper surveys American business cycles over the past century.
Its task is to identify the causes of these cycles; other papers in this
collection address the nature of policy responses to these causes. This
paper can be seen as a test to discriminate between two views of the
American economy. The first is expressed in a characteristically vivid
statement by Dornbusch, who proclaimed recently: gNone of the U.S.
expansions of the past 40 years died in bed of old age; every one was
murdered by the Federal Reserveh (Dornbusch 1997). This stark view can
be contrasted with its opposite in the recent literature: g[N]one of the
popular candidates for observable shocks robustly accounts for the bulk
of business-cycle fluctuations in outputh (Cochrane 1994, p. 358).
I expand the time period to consider the past century, but it is easy
to distinguish the past 40 years, that is, the period since World War II. A
survey of business cycle causes over an entire century runs into several
problems, of which three seem noteworthy. First, it is not at all clear what
gcauseh means in this context. Second, the Great Depression was such a
large cycle that it cannot be seen as just another data point. Third, the
survey relies on the existing literature on business cycles, which is why I
have entitled it an essay in economic historiography. The paper proceeds
by discussing each of these problems in turn, then turning to the data,
and finally drawing some conclusions from the preceding efforts.
*Elisha Gray II Professor of Economics, Massachusetts Institute of Technology. The
author would like to thank Caroline Richards for research assistance. All errors remain the
authorfs alone.
BUSINESS CYCLES: DEFINITION AND ANALYSIS
The cause of a business cycle typically is taken to be a shock or
innovation to a relationship in the economy. Myriad relationships operate
in a complex economy like ours, and some way needs to be found to
impose order on the analysis of shocks. Order typically is imposed by
abstracting from the actual economy to an abstract model. A more
operational definition of cause, therefore, is a shock to a relationship in a
macroeconomic model. It follows that shocks may be specific to models,
which differ both in their level of detail and in their basic assumptions.
With differing levels of inclusiveness, one personfs shock may be
anotherfs movement of an endogenous variable. Government actions are
a case in point. Variation in government purchasing is taken to be
exogenous in many economic models, and it is eligible as a business cycle
cause in these models. But the growth of political economy has led people
to endogenize government actions. Only deviations from the rule then
would be admissible as a shock. Brown (1956) long ago looked for
Keynesian stimuli during the Great Depression. He sanitized government
spending to eliminate automatic stabilizers, that is, variations due to ...

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