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Business Cycle Durations and Postwar Stabilization of the U.S. Economy

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  • Mark W. Watson

Abstract

The average length of business cycle contractions in the United States fell from 20.5 months in the prewar period to 10.7 months in the postwar period. Similarly, the average length of business cycle expansions rose from 25.3 months in the prewar period to 49.9 months in the postwar period. This paper investigates three explanations for this apparent duration stabilization. The first explanation is that shocks to the economy have been smaller in the postwar period. This implies that duration stabilization should be present in both aggregate and sectoral output data. The second explanation is that the composition of output has shifted from sectors that are very cyclical, like manufacturing, to sectors that are less cyclical, like services. This would lead to increased stability in aggregate output even in the absence of increased stability in the individual sectors. The third explanation is that the apparent stabilization is largely spurious, and is caused by differences in the way that prewar and postwar business cycle reference dates were chosen by the NBER. The evidence presented in this paper favors this third explanation.

Suggested Citation

  • Mark W. Watson, 1992. "Business Cycle Durations and Postwar Stabilization of the U.S. Economy," NBER Working Papers 4005, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:4005
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    1. J. Bradford DeLong & Lawrence H. Summers, 1986. "The Changing Cyclical Variability of Economic Activity in the United States," NBER Chapters,in: The American Business Cycle: Continuity and Change, pages 679-734 National Bureau of Economic Research, Inc.
    2. Robert J. Gordon, 1986. "The American Business Cycle: Continuity and Change," NBER Books, National Bureau of Economic Research, Inc, number gord86-1.
    3. Diebold, Francis X & Rudebusch, Glenn D, 1992. "Have Postwar Economic Fluctuations Been Stabilized?," American Economic Review, American Economic Association, vol. 82(4), pages 993-1005, September.
    4. Martin Neil Baily, 1978. "Stabilization Policy and Private Economic Behavior," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(1), pages 11-60.
    5. Balke, Nathan S & Gordon, Robert J, 1989. "The Estimation of Prewar Gross National Product: Methodology and New Evidence," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 38-92, February.
    6. King, Robert G. & Plosser, Charles I., 1994. "Real business cycles and the test of the Adelmans," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 405-438, April.
    7. Wesley Clair Mitchell, 1927. "Business Cycles: The Problem and Its Setting," NBER Books, National Bureau of Economic Research, Inc, number mitc27-1.
    8. Gerhard Bry & Charlotte Boschan, 1971. "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs," NBER Books, National Bureau of Economic Research, Inc, number bry_71-1.
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