S10 MyCh08 - Ch. 8 Business Cycles Motivation The Business...

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Unformatted text preview: Ch. 8 Business Cycles Motivation The Business Cycle Theory Lucas Misperception Model Lucas critique against econometrics 1 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. 3 Motivation Business cycles pertain to the major fluctuations around the trend line 4 A schematic view 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) 6 The Burns - Mitchell View 1. I t 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) 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 8 Personal interpretations Agricultural societies at the mercy of Nature Manufacturing activities lumpy, hard to smooth Service industries Human expectations dominate (theoretically more manageable) or I n Sear ch of The Time Lost (1978 Edition) by Rober t E. Lucas, Jr ....
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S10 MyCh08 - Ch. 8 Business Cycles Motivation The Business...

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