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Business Cycles Observed and Assessed: Why and How They Matter

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  • Victor Zarnowitz

Abstract

Business cycles are fairly well defined yet they have no generally accepted explanation. Natural disasters and then financial crises constituted the earliest perceived reasons for economic instability. Classical literature developed in late 19th-early 20th century favored the idea of self-sustaining or endogenous fluctuations, but recent models stress outside factors and random shocks. In an ideal world under assumptions of perfect competition, flexible prices, national expectations, and money neutrality, real business cycles due to shocks to technology are possible and perhaps also shocks to tastes, relative prices, and fiscal variables. In the real world, there is evidence that many sticky prices and wages coexist with many flexible prices flexible prices and wages. Movements in levels of prices can be stabilizing even while movements in expected changes of prices are destabilizing. Cyclical movements in nominal aggregates point to the role of money. The premise of passive money clashes with the view that monetary policy is very important. Recent history shows monetary factors influence the course of economic activity along with real and expectational variables. Certain variables have long been critically important in business cycles as shown by historical studies within and across countries: profits, investment, interest rates, money and credit. Leads and lags, nonlinearities and asymmetries also had demonstrably eminent roles, which they retain. Multiple-shock models are superior to single-shock models. Finally, recessions have high social costs in terms of unemployment and depressed growth. Expansions can also be costly by causing imbalances and excesses. Structural and policy problems may seem to be separable from these cyclical problems but often are not.

Suggested Citation

  • Victor Zarnowitz, 1997. "Business Cycles Observed and Assessed: Why and How They Matter," NBER Working Papers 6230, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:6230
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    References listed on IDEAS

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    3. Mauro Napoletano & Andrea Roventini & Sandro Sapio, 2006. "Are Business Cycles All Alike? A Bandpass Filter Analysis of the Italian and US Cycles," Rivista italiana degli economisti, Società editrice il Mulino, issue 1, pages 87-118.
    4. G. Fagiolo & A. Roventini., 2009. "On the Scientific Status of Economic Policy: A Tale of Alternative Paradigms," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 6.
    5. Giovanni Dosi & Andrea Roventini, 2019. "More is different ... and complex! the case for agent-based macroeconomics," Journal of Evolutionary Economics, Springer, vol. 29(1), pages 1-37, March.
    6. Giovanni Dosi & Giorgio Fagiolo & Andrea Roventini, 2005. "Animal Spirits, Lumpy Investment, and Endogenous Business Cycles," LEM Papers Series 2005/04, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    7. Fagiolo G. & Roventini A., 2004. "Animal Spirits, Lumpy Investment, and the Business Cycle," Computing in Economics and Finance 2004 109, Society for Computational Economics.
    8. Giovanni Dosi & Giorgio Fagiolo & Andrea Roventini, 2006. "An Evolutionary Model of Endogenous Business Cycles," Computational Economics, Springer;Society for Computational Economics, vol. 27(1), pages 3-34, February.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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