the conventional wisdom is that recessions aren’t as bad as they used to be. but is the...
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The conventional wisdomis that recessions aren’t
as bad as they used to be.But is the conventional
wisdom flawed?
Time
Rea
l GD
P
“The bottom line is . . . That [m]ajor macroeonomic indicators have not become dramatically more stable between the pre-World War I and Post World War I eras, and recessions have become only slightly less severe on average. Recessions have, however, become less frequent and more uniform over time.”1
1 Christina Romer.“Changes in Business Cycles: Evidence and Explanations,” Journal of Economic Perspectives, 13(2), Spring 1999, p. 23.
Romer claims that the GDP series most frequently used for comparisons of pre-World War I with post-World War II cycles are excessively volatile because they were derived from data on the output of commodities (pig iron, coal, oil, wheat) . Most assumed that there was a one-to-one correspondence between output changes in these highly volatile industries and real GDP. Romer corrects for this defect and produces alternative estimates of real output.
1886-1916 1920-1940 1948-1997
Peak Trough Peak Trough Peak Trough
1887:2 1887:7 1920:1 1921:3 1948:11 1949:101893:1 1894:2 1923:5 1924:7 1953:7 1954:5
1896:1 1897:1 1927:3 1927:12 1957:8 1958:4
1900:4 1900:12 1929:9 1932:7 1960:4 1961:2
1903:7 1904:3 1937:8 1938:6 1969:12 1970:11
1907:7 1908:6 1939:12 1940:3 1973:11 1975:3
1910:1 1911:5 1980:1 1980:7
1914:6 1914:12 1981:7 1982:11
1916:5 1917:1 1990:7 1991:3
Dates of Peaks and Troughs 1
Source: Romer (1999)
1Post World War II dates are identical to NBER dates. Pre-WWII dates are computed using the methodology described by Romer(1999, p. 29).
Business Cycle Reference Dates in the U.S., 1919-1991
Trough Peak TroughExpansionin Months
Contractionin Months
Mar 1919 Jan 1920 July 1921 10 18
July 1921 May 1923 July 1924 22 14
July 1924 Oct 1926 Nov 1927 27 13
Nov 1927 Aug 1929 Mar 1933 21 43
Mar 1933 May 1937 June 1938 50 13
June 1938 Feb 1945 Oct 1945 80 8
Oct 1945 Nov 1948 Oct 1949 37 11
Oct 1949 July 1953 May 1954 45 10
May 1954 Aug 1957 Apr 1958 39 8
Apr 1958 Apr 1960 Feb 1961 24 10
Feb 1961 Dec 1969 Nov 1970 106 11
Nov 1970 Nov 1973 Mar 1975 36 16
Mar 1975 Jan 1980 July 1980 58 6
July 1980 July 1981 Dec 1982 12 17
Dec 1982 July 1990 April 1991 88 9
Apr 1991 ? ? ?1 ?
Source: Bureau of Economic Analysis
1101 months through August, 1999
Index of Industrial Production
Year/Month0
100
Apr 1960
Feb 1961
May 1961
P T
Green shaded area is cumulative loss, given by the sum of the percentage shortfall for each month from April 1960 to may 1961
1886-1916 1920-1940 1948-1997
Year ofPeak
OutputLoss
Year ofPeak
OutputLoss
Year ofPeak
OutputLoss
1887 57.8 1920 662.7 1948 117.41893 260.1 1923 188.2 1953 122.5
1896 135.6 1927 67.9 1957 140.1
1900 80.1 1929 3120.0 1960 93.0
1903 115.5 1937 579.8 1969 98.0
1907 304.3 1939 64.7 1973 248.1
1910 153.3 1980 73.1
1914 74.6 1981 187.4
1916 46.3 1990 76.4
Ave. 136.4 Ave. 780.5 Ave. 128.4
Output Loss1
Source: Romer (1999)
1Output loss is the sum of the percentage shortfall of industrial production in each month between the peak and he return to the peak. It is measured in percentage points.
Cycles differ in theirduration and severity (though
duration is obviously oneaspect of the severity of a contraction). In examining
cycles in comparative perspective,are there any discerniblesimilarities or patterns?
“Though there is absolutely no theoretical reason to anticipate it, one is led by the facts to conclude that, with respect to the qualitative behavior of co-movements among series, business cycles are all alike.” (Lucas 1981, p. 218).
Robert E. Lucas. “Understanding Business Cycles,” reprinted in Studies in Business-Cycle Theory by Robert E. Lucas. Cambridge, MA: MIT Press, 1981, 215-239.
“The regularities observed are in the co-movements among different [aggregate] time series, e.g.Output movements across broadly defined sectors move together (they exhibit high conformity).Production of producer and consumer durables exhibits much greater amplitude than production of nondurables.Production and prices of agricultural goods and natural resources have lower than average conformity.Business profits show high conformity and much greater amplitude than other series.Prices are generally procyclical.Short-term interest rates are procylical; long-term rates slightly so.Monetary aggregates are procyclical.” (Lucas, 1981, p. 217).
Now we want to examine the behavior of keyaggregate-level time
series in the 1979-83 periodin the U.S. Note that this period
spans two full contractions(recessions) and one full
expansion.
Real GDP in the U.S., 1979-83
annual rate
Source: Bureau of Economic Analysis
Year/Quarter
83.4
83.3
83.2
83.1
82.4
82.3
82.2
82.1
81.4
81.3
81.2
81.1
80.4
80.3
80.2
80.1
79.4
79.3
79.2
79.1
billions
of
1992 d
ollars
5100
5050
5000
4950
4900
4850
4800
4750
4700
46504600
Jan.80 is a peak; Jul. 80 is a trough; Jul. 81 is a peak; Dec. 1982 is a trough.
Quarterly Change in GDP, 1979-83
annual rate
Source: Bureau of Economic Analysis
Year/Quarter
83/383/182/382/181/381/180/380/179/3
billions
of
1992 d
ollars
200
150
100
50
0
-50
-100
-150
-200
Consumer Durable Spending, 1979-93
annual rate
Source: Bureau of Economic Analysis
Year/Quarter
83/483/282/482/281/481/280/480/279/4
billions
of
1992 d
ollars
360
350
340
330
320
310
300
290
280
270
260
Gross Private Domestic Investment, 1979-83
annual rate
Source:Bureau of Economic Analysis
Year/Quarter
83/383/182/382/181/381/180/380/179/3
billions o
f 1992 d
ollars
800
750
700
650
600
550
500
Consumer Nondurable Spending, 1979-83
annual rate
Source: Bureau of Economic Analysis
Year/Quarter
83/383/182/382/181/381/180/380/179/3
billions
of
1992 d
ollars
1140
1120
1100
1080
1060
1040
Consumer Spending for Services, 1979-83
annual rate
Source: Bureau of Economic Analysis
Year/Quarter
83/383/182/382/181/381/180/380/179/3
billions
of
1992 d
ollars
1900
1850
1800
1750
1700
1650
1600
Imports and exports of the U.S., 1979-83
annual rate
Year/Quarter
83.383.182.382.181.381.180.380.179.3
billions o
f 1992 d
ollars
360
350
340
330
320
310
300
290
Exports
Imports
Quarterly Rate of Change of (Nominal) GDP and the Money Stock
1979-83
Source: Bureau of Economic Analysis and the Federal Reserve of New York
Year/Quarter
83/483/282/482/281/481/280/480/279/1
perc
ent
10
8
6
4
2
0
-2
-4
-6-8
GNP
M1
Yields of U.S. Treasury Issues, 1979-83
Source: Federal Reserve of New York
Month/Year
Oct 83Feb 83Jun 82Oct 81Feb 81Jun 80Oct 79
Perc
ent
per
year
18
16
14
12
10
8
6
6 Mo.Treasury Bill
10-Yr Treasury Bond
Now we want to examine the behavior of keyaggregate-level time
series in the 1990-91 recession.
GDP in the U.S., 1989-93
annual rate
Source: Bureau of Economic Analysis
Year/Quarter
93.1
92.4
92.3
92.2
92.1
91.4
91.3
91.2
91.1
90.4
90.3
90.2
90.1
89.4
89.3
bilii
ons
of 1
992
dolla
rs6400
6350
6300
6250
6200
6150
6100
6050
6000
July 90 is a peak; April 91 is a trough;
Consumption Expenditure in the U.S., 1989-93
annual rate
Year/Quarter
93.1
92.4
92.3
92.2
92.1
91.4
91.3
91.2
91.1
90.4
90.3
90.2
90.1
89.4
89.3
billions
of
1992 d
ollars
4300
4275
4250
4225
4200
4175
4150
4125
4100
4075
4050
40254000
Investment, Exports, and Imports of the U.S., 1989-93
annual rate
Source: Bureau of Economic Analysis
Year/Quarter
93.1
92.4
92.3
92.2
92.1
91.4
91.3
91.2
91.1
90.4
90.3
90.2
90.1
89.4
89.3
billions
of
1992 d
ollars
900
850
800
750
700
650
600
550
500
Investment
EXPORTS
IMPORTS