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Beyond shocks: what causes business cycles? an overview

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  • Jeffrey C. Fuhrer
  • Scott Schuh

Abstract

What makes economies rise and fall? What caused the Asian crisis, the recessions of the 1970's and 1980's, and even the Great Depression? According to many modern economists, shocks did. This unsatisfying answer lies at the heart of a currently popular framework for analyzing business cycle fluctuations. This framework assumes that the macroeconomy usually obeys simple behavioral relationships but is occasionally disrupted by large "shocks", which force it temporarily away from these relationships and into recession. The behavioral relationships then guide the orderly recovery of the economy back to full employment, where the economy remains until another significant shock upsets it.> Attributing fluctuations to shocks - movements in important economic variables that occur for reasons we do not understand - means we can never fully understand why they occur. As a result, it will always be difficult to predict recessions and to know what government policies would best avert or ameliorate them. Thus, the forty-second economic conference of the Federal Reserve Bank of Boston had as one of its key goals the identification of economic causes of business cycles. The greater the proportion of fluctuations we can classify as the observable and explainable product of purposeful economic decisions, the better chance we have of understanding, predicting, and avoiding recessions. Most participants at the conference concluded that the business cycle is not dead but is likely here to stay. Consequently, most also agreed that policymakers must learn to recognize and address the economy's vulnerability to disruptions and support research into the contribution of actions of economic agents to economic fluctuations. This article reviews the presentations at the conference and the themes that developed from the discussions.

Suggested Citation

  • Jeffrey C. Fuhrer & Scott Schuh, 1998. "Beyond shocks: what causes business cycles? an overview," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 3-24.
  • Handle: RePEc:fip:fedbne:y:1998:i:nov:p:3-24
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    Cited by:

    1. Zarnowitz, Victor & Ozyildirim, Ataman, 2006. "Time series decomposition and measurement of business cycles, trends and growth cycles," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1717-1739, October.
    2. Curtis Simon, 2014. "Sectoral Change And Unemployment During The Great Recession, In Historical Perspective," Journal of Regional Science, Wiley Blackwell, vol. 54(5), pages 828-855, November.
    3. Kevin L. Kliesen, 2003. "The 2001 recession: how was it different and what developments may have caused it?," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 23-38.
    4. Carlos Esteban Posada P., 1999. "Los Ciclos Económicos En El Siglo Xx," BORRADORES DE ECONOMIA 003158, BANCO DE LA REPÚBLICA.
    5. Mody, Ashoka & Sarno, Lucio & Taylor, Mark P., 2007. "A cross-country financial accelerator: Evidence from North America and Europe," Journal of International Money and Finance, Elsevier, vol. 26(1), pages 149-165, February.
    6. Oleg Korenok & Stanislav Radchenko, 2006. "The role of permanent and transitory components in business cycle volatility moderation," Empirical Economics, Springer, vol. 31(1), pages 217-241, March.
    7. Luca Benati, 2003. "Evolving Post-World War II U.K. Economic Performance," Computing in Economics and Finance 2003 171, Society for Computational Economics.
    8. Lean, Hooi Hooi & Teng, Kee Tuan, 2013. "Integration of world leaders and emerging powers into the Malaysian stock market: A DCC-MGARCH approach," Economic Modelling, Elsevier, vol. 32(C), pages 333-342.
    9. Michael D. Bordo & John Landon Lane & Angela Redish, 2004. "Good versus Bad Deflation: Lessons from the Gold Standard Era," NBER Working Papers 10329, National Bureau of Economic Research, Inc.
    10. Frédéric Warzynski, 2003. "The causes and consequences of sector-level job flows in Poland ," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 11(2), pages 357-381, June.
    11. Höppner, Florian & Gottschalk, Jan, 2001. "Measuring the Effects of Monetary Policy in the Euro Area: The Role of Anticipated Policy," Kiel Working Papers 1074, Kiel Institute for the World Economy (IfW).

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    Keywords

    Business cycles ; Monetary policy;

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