Business Cycle

fluctuation of Econom Ic activity around its long-term trend

is this due to lags in FeedBack?

Christina Romer says: *Recessions also appear to have occurred more frequently and lasted longer in the prewar era than in the postwar era. (Great Depression)

But appearances are deceiving. The kind of statistics that economists use to measure the severity of business cycles, such as data on the unemployment rate, real gross national product, and industrial production, have been kept carefully and consistently only since World War II. Therefore, the conclusion that government policy has smoothed business cycles is based on a comparison of fragmentary prewar evidence with sophisticated postwar statistics.

In some recent research, I have tried to avoid the problem of inconsistent data by comparing the crude prewar statistics with equally crude postwar statistics. That is, I have compared the existing prewar series with modern data that are constructed using the same assumptions and data fragments that were used to piece together the prewar series. These comparisons show essentially no decline in the severity of cycles between the prewar and postwar eras. They also show little change in the duration and frequency of cycles over time. Thus, much of our apparent success at eliminating the business cycle seems to be a figment of the data.

Why has Public Policy failed to cure business cycles in the United States? One reason is that monetary and fiscal policy are difficult to use with any precision. There are long lags in the implementation and effect of changes in spending, taxes, and monetary stance. There is also significant uncertainty about how much of a monetary or fiscal stimulus is needed to end a recession of a particular severity. Finally, policymakers also often have conflicting goals.*

Edited:    |       |    Search Twitter for discussion