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A regional perspective on the U.S. business cycle

  • Economics


NO179 Chicago Fed Letter A regional perspective on the U.S. business cycle by Michael Kouparitsas It is not difficult to come up with a definition of the business cycle that most of us would understand. A thornier issue is how to come up with an empirical measure of the business cycle. This article tackles the question and, in the process, offers a new measure of the U.S. business cycle, derived from regional data. A highlight of this approach is that it facilitates the identification of region-specific influences, such as technology booms or commodity price spikes. ESSAYS ON ISSUES THE FEDERAL RESERVE BANK NOVEMBER 2002 OF CHICAGO NUMBER 183 1. U.S. business cycles percent deviation from trend NOTE: Shaded areas indicate recessions as defined by the National Bureau of Economic Research. SOURCE: Author’s calculations based on BEA data. 1961 ’65 ’69 ’73 ’77 ’81 ’85 ’89 ’93 ’97 ’01 -8 -4 0 4 8 On a recent flight to Australia, the trav- eler in the neighboring seat (upon learn- ing that I was an economist) promptly asked me to explain what the business cycle was. I pointed out that I was an academic economist and that my answer might be a little vague. My neighbor quickly reminded me that we had 15 hours to work out the details. In fact, as I explain below, my defi- nition of the business cycle is pretty easy to understand, so it took no time at all to answer her question. On the other hand, I did not com- plete my answer to her fol- low-up question on whether it was possible to come up with an empirical measure of the business cycle before touching down at Sydney’s Kingsford Smith Airport, since she tended to doze off every time I uttered some statistical jargon. The mainstream academic view of the business cycle has its roots in the pio- neering analysis of Burns and Mitchell conducted in the 1940s.1 Burns and Mitchell’s definition emphasizes that business cycles consist of expansions occurring at about the same time in many economic activities, followed by

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