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The "new" theory of the business cycle: are recessions just random?

  • Economics
  • Political Science


Larry Butler* Business cycles are features of all market- oriented economies. In the United States, there have been six recessions since the end of World War II, separated by generally long-lived periods of expansion. Measured from trough to trough, these cycles have varied in length from just under three years to ten full years. The associated downturns have varied greatly in severity. Until the most recent recession, whose trough was reached in early 1975, it was possible to argue that government stabilization efforts had be- come increasingly successful, judging by the reduction in observed movements in income. But the last recession, the most severe of the postwar period, destroyed any thoughts that we had in fact learned to control the cycle. Despite the varying depth and duration of these business cycles, they have displayed strik- ing similarities both in the U.S. and in other market-oriented economies. In each cycle, for example, I. the major components of output have moved together; 2. the output of producer goods and consum- er durable goods have fluctuated much more than the output of non-durable goods and services; and 3. both wages and profits have moved with output, although with a greater variability in the profits share of income. Thus income and its components have displayed a highly consistent relationship to each otheL l The principal features of the expansions we have experienced include the consistency of income shares and the highly irregular timing of cyclical turning points. In this article we attempt to explain the feature of timing-why recessions *Senior Economist, Federal Reserve Bank of San Francisco 6 occur when they do-which is probably the least understood feature of the cycle. In fact, both regularities and erratic timing have been so pronounced as to require an explanation of observed cycles, that is, a theory of the cycle. According to the "new" theory of the cycle analyzed here, cyclical events can be seen as arising from random shocks to th

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