Transcript Time

The conventional wisdom
is that recessions aren’t
as bad as they used to be.
But is the conventional
wisdom flawed?
Time
“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 postWorld 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.
Dates of Peaks and Troughs 1
1886-1916
1920-1940
Trough
1948-1997
Peak
Trough
Peak
Peak
Trough
1887:2
1893:1
1887:7
1894:2
1920:1
1923:5
1896:1
1897:1
1927:3 1927:12 1957:8
1921:3 1948:11 1949:10
1924:7 1953:7 1954:5
1900:4 1900:12 1929:9
1932:7
1903:7
1904:3
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
1990:7
1991:3
1917:1
1937:8
1960:4
1958:4
1961:2
1Post
World War II dates are identical to NBER dates. Pre-WWII dates are computed
using the methodology described by Romer(1999, p. 29).
Source: Romer (1999)
Business Cycle Reference Dates in the U.S., 1919-1991
Trough
Peak
Trough
Expansion
in 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
Contraction
in Months
Index of Industrial
Production
P
Green shaded area is
cumulative loss, given
by the sum of the
percentage shortfall for
each month from April
1960 to may 1961
T
100
0
Apr
1960
Feb
1961
May
1961
Year/Month
Output Loss1
1886-1916
1920-1940
1948-1997
Year of
Peak
1887
1893
Output
Loss
57.8
260.1
Year of
Peak
1920
1923
Output
Loss
662.7
188.2
Year of
Peak
1948
1953
Output
Loss
117.4
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.
128.4
Ave.
780.5
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.
Source: Romer (1999)
Cycles differ in their
duration and severity (though
duration is obviously one
aspect of the severity of a
contraction). In examining
cycles in comparative perspective,
are there any discernible
similarities 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 key
aggregate-level time
series in the 1979-83 period
in 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
5100
5050
5000
4950
4900
4850
4800
4750
4700
4650
4600
79.1
79.3
79.2
80.1
79.4
80.3
80.2
81.1
80.4
81.3
81.2
82.1
81.4
82.3
82.2
83.1
82.4
83.3
83.2
83.4
Yea r/Quarter
Source: Bureau of Economic Analysis
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
200
150
100
50
0
-50
-100
-150
-200
79/3
80/1
80/3
81/1
81/3
82/1
Year/Quarter
Source: Bureau of Economic Analys is
82/3
83/1
83/3
Consumer Durable Spending, 1979-93
annual rate
360
350
340
330
320
310
300
290
280
270
260
79/4
80/2
80/4
81/2
81/4
82/2
Yea r/Quarter
Source: Bureau of Economic Analysis
82/4
83/2
83/4
Gross Private Domestic Investment, 1979-83
annual rate
800
750
700
650
600
550
500
79/3
80/1
80/3
81/1
81/3
82/1
Yea r/Quar ter
Source:Bureau of Ec onomic Analysis
82/3
83/1
83/3
Consumer Nondurable Spending, 1979-83
annual rate
1140
1120
1100
1080
1060
1040
79/3
80/1
80/3
81/1
81/3
82/1
Year/Quarter
Source: Bureau of Economic Analys is
82/3
83/1
83/3
Consumer Spending for Services, 1979-83
annual rate
1900
1850
1800
1750
1700
1650
1600
79/3
80/1
80/3
81/1
81/3
82/1
Yea r/Quarter
Source: Bureau of Economic Analysis
82/3
83/1
83/3
Imports and exports of the U.S., 1979-83
annual rate
360
350
340
330
320
310
300
Exports
290
79.3
Imports
80.1
80.3
81.1
81.3
82.1
Yea r/Quar ter
82.3
83.1
83.3
percent
Quarterly Rate of Change of (Nominal) GDP and the Money S tock
1979-83
10
8
6
4
2
0
-2
-4
GNP
-6
-8
M1
79/1
80/2
80/4
81/2
81/4
82/2
82/4
83/2
83/4
Yea r/Quarter
Source: Bureau of Ec onomic Analysis and the Federal Reserve of New York
Yields of U.S. Tre asury Issues, 1979 -83
18
16
14
12
10
8
6 Mo.Treasury Bill
6
10-Y r Treas ury Bond
Oct 79 Jun 80 Feb 81 Oct 81 Jun 82 Feb 83 Oct 83
Mon th/Yea r
Source: Federal Reserve of New York
Now we want to examine
the behavior of key
aggregate-level time
series in the 1990-91 recession.
GDP in the U.S., 1989-93
annual rate
6400
6350
6300
6250
6200
6150
6100
6050
6000
89.3
90.1
89.4
90.3
90.2
91.1
90.4
91.3
91.2
92.1
91.4
Year/Quarter
Source: Bureau of Economic Analysis
July 90 is a peak; April 91 is a trough;
92.3
92.2
93.1
92.4
Consumption Expenditure in the U.S., 1989-93
annual rate
4300
4275
4250
4225
4200
4175
4150
4125
4100
4075
4050
4025
4000
89.3
90.1
89.4
90.3
90.2
91.1
90.4
91.3
91.2
Yea r/Quarter
92.1
91.4
92.3
92.2
93.1
92.4
Investment, Exports, and Imports of the U.S., 1989-93
annual rate
900
850
800
750
700
650
Inve stmen t
600
EXPORTS
550
500
89.3
IMPORTS
90.1
89.4
90.2
90.3
91.1
90.4
91.3
91.2
92.1
91.4
Yea r/Quarter
Source: Bureau of E conomic Analys is
92.3
92.2
92.4
93.1