Mych08 - Ch. 8 Business Cycles Motivation...

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Ch. 8 Business Cycles Motivation The Business Cycle Theory Lucas’ Misperception Model Lucas critique against econometrics 1
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2 Having introduced money in the discussion, we are ready to consider business cycles, for which, money is the cause, to some, like Lucas, and the cure, to others, like the Keynesians.
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3 Motivation Business cycles     pertain to           the major fluctuations                  around          the trend line
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4 A schematic view
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5 Why so?    The economic structure is a pendulum        Business cycle is its rhythm What to do?    Damping it        by structural re-design (‘Classicals’)       by offsetting action (Keynesians)  
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6 The Burns - Mitchell View 1. It is about  aggregate economic activity       < Not a single index like GDP > 1. Concerning  expansions / contractions 2. The  ‘co-movements’  of series with leads- lags,         and different magnitudes give the key 1. Recurrent  but not  cyclical 2. Persistent not   random  (Cannot turn  around on a dime)
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7 American facts  Very bad in the 19th century          (or portrayed to be so, by C. Romer) The ‘great depression’, in 2 waves Wars coincide with recovery and expansion Except for oil shocks, and now        recent recessions infrequent, shallow,  short               the 1990s and recent long booms
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8 Personal interpretations Agricultural societies         – at the mercy of Nature Manufacturing activities        – lumpy, hard to smooth Service industries        – Human expectations dominate             (theoretically more manageable)
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In Search of  The Time Lost (1978 Edition) by Robert E. Lucas, Jr. Business Cycle Theory
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Mych08 - Ch. 8 Business Cycles Motivation...

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