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Beyond shocks: what causes business cycles? an overview

  • Jeffrey C. Fuhrer
  • Scott Schuh

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.

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Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

Volume (Year): (1998)
Issue (Month): Nov ()
Pages: 3-24

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Handle: RePEc:fip:fedbne:y:1998:i:nov:p:3-24
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