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Theory and History Behind Business Cycles: Are the 1990s the Onset of a Golden Age?


  • Victor Zarnowitz


The disputes over the prospects for the current U.S. expansion reopen the issue of the causes of business cycles. A recurrent concern about the present is that expectations of business profits and market returns may be outrunning the economy's potential to deliver. The theory presented in this paper ties together profits, investment, credit, stock prices, inflation and interest rates. I discuss new estimates of profit and investment functions with important roles for growth of demand and productivity, price and cost levels, risk perception, credit volume and credit difficulties. The relationships among these endogenous variables are viewed as constituting an enduring core of business cycles, the exogenous shocks and policy effects as more transitory and peripheral. The U.S. upswing of the past three years provides a vivid example of how profits, investment, and an exuberant stock market can reinforce each other. Long business expansions benefit society in several ways but they generate imbalances and are difficult to sustain. Recent events in Asia demonstrate how investment-driven booms can give way to a protracted stagnation with tendencies toward deflation and underconsumption or to severe depressions. After a deterioration in the 1970s and early 1980s, U.S. business cycles moderated again, as in the first two post-WWII decades. But globally recessions became more frequent and more severe in the second half of the postwar era. The arguments in favor a new Golden Age are generally not persuasive.

Suggested Citation

  • Victor Zarnowitz, 1999. "Theory and History Behind Business Cycles: Are the 1990s the Onset of a Golden Age?," NBER Working Papers 7010, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:7010
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    References listed on IDEAS

    1. Zellner, Arnold & Hong, Chansik & Min, Chung-ki, 1991. "Forecasting turning points in international output growth rates using Bayesian exponentially weighted autoregression, time-varying parameter, and pooling techniques," Journal of Econometrics, Elsevier, vol. 49(1-2), pages 275-304.
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    Cited by:

    1. Bulan, Laarni & Mayer, Christopher & Somerville, C. Tsuriel, 2009. "Irreversible investment, real options, and competition: Evidence from real estate development," Journal of Urban Economics, Elsevier, vol. 65(3), pages 237-251, May.
    2. Mark D. Partridge, 2001. "Changes in U.S. and Canadian Wage Dynamics in the 1990s: How Unique Are Favorable U.S. Labor Market Developments?," The Review of Regional Studies, Southern Regional Science Association, vol. 31(1), pages 71-93, Summer.
    3. Erin Yeldan & Kivilcim Metin-…zcan & Ebru Voyvoda, 1999. "Dynamics of Macroeconomic Adjustment in a Globalized Developing Economy : Growth, Accumulation and Distribution, Turkey 1969-1998," Working Papers 9905, Department of Economics, Bilkent University.
    4. Colin Beardsley & John R. O'Brien, 2004. "Measuring the Impact of Regulationon Market Stability: Evidence from the US Markets," ICMA Centre Discussion Papers in Finance icma-dp2004-02, Henley Business School, Reading University.
    5. Mark D. Partridge & Dan S. Rickman, 2002. "Did The New Economy Vanquish The Regional Business Cycle?," Contemporary Economic Policy, Western Economic Association International, vol. 20(4), pages 456-469, October.
    6. Shaffer, Sherrill & Hoover, Scott, 2008. "Endogenous screening, credit crunches, and competition in laxity," Review of Financial Economics, Elsevier, vol. 17(4), pages 296-314, December.
    7. Fazzari, Steven & Ferri, Piero & Greenberg, Edward, 2008. "Cash flow, investment, and Keynes-Minsky cycles," Journal of Economic Behavior & Organization, Elsevier, vol. 65(3-4), pages 555-572, March.
    8. Selover David D. & Jensen Roderick V. & Kroll John, 2003. "Industrial Sector Mode-Locking and Business Cycle Formation," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 7(3), pages 1-39, October.

    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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