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Definition of Economic recession in the Financial Dictionary - by Free online by the Business Cycle Dating Committee of the National Bureau of Economic. We describe different ways of measuring the business cycle. In their classic work Measuring Business Cycles, Burns and Mitchell (BM) () define specific cycles in a .. one could look at the NBER Business Cycle Dating Committee procedure. as seen in its discussion about dating the recession (NBER, ). The recession phase is marked by a rapidly declining economy from its peak. The only real constraint in the definition is that if a business cycle is defined The NBER's business cycle dating committee follows standard procedures .. A Dictionary of Sociology , originally published by Oxford University Press
Most economists accept that fiscal policy, especially in wartime, has been a source of cyclical instability. As noted above, it is the so-called Keynesian economists who believe that the private sector is inherently unstable. While noting the historical instability of investment in tangible assets, they have also emphasized shifts in liquidity preference demand for money as an independent source of instability. As a counter to the standard Keynesian position, there has arisen a school of thought emphasizing real business cycles.
This school contends that nonmonetary variables in the private sector are a major source of cyclical instability and that the observed sympathetic movements between monetary variables and the level of economic activity result from a flow of causation from the latter to the former.
The changes in real factors cause the monetary factors to change, not vice versa. In this way they are somewhat like Wicksell. These series are identified, measured, and used for forecasting the turning points of the business cycle. Called economic indictors, they are divided into three groups—leading, lagging, and roughly coincidental. The leading indicators are those economic series that change direction in advance of the business cycle. The lagging indicators change direction after the overall economy has moved, while coincident indicators move in tandem with the aggregate economic activity.
Basic economic indicators consist of 10 leading, 7 lagging, and 4 coincident series. In order to smooth out the volatility of individual series in each group and to provide a single measure to represent the entire group, a composite index for each group composite indicator is constructed.
The measures of basic indicators and the composites are calculated and published by the Conference Board, a not-for-profit organization. Beating the business cycle. What do we know about macroeconomics that Fisher and Wicksell did not?
National Bureau of Economic Research. Burns, Arthur, and Mitchell, Wesley C.
Business acceleration and the law of demand: A technical factor in economic cycles. Journal of Political Economy, 25, — Business cycle indicators handbook. King, Robert, and Plosser, Charles Money, credit and prices in a real business cycle. American Economic Review, 74 3— King, Robert, and Rebelo, Sergio Journal of Political Economy, 91 1 39— Studies in business cycle theory.
Rational expectations and econometric practice. University of Minnesota Press. A new Keynesian perspective. The Journal of Economic Perspectives, 3 379— Mitchell, Wesley Clair Alternative approaches to the political business cycle. Brookings Papers on Economic Activity, 2, 1— Realbusiness-cycle models and the forecastable movements in output, hours, and consumption.
The American Economic Review, 86 171— The theory of economic development. Lectures on political economy. The political economy of money, inflation, and unemployment. Recent work on business cycles in historical perspective: A review of theories and evidence. Journal of Economic Literature, 23 2— Business cycles, theory, history, indicators, and forecasting. In the Keynesian view, business cycles reflect the possibility that the economy may reach short-run equilibrium at levels below or above full employment.
If the economy is operating with less than full employment, i. Beside the Keynesian explanation there are a number of alternative theories of business cycles, largely associated with particular schools or theorists in heterodox economics. A common alternative within mainstream economics is real business cycle theory. Nowadays other notable theories are credit-based explanations such as debt deflation and the financial instability hypothesis.
The latter two gained interest for being able to explain the subprime mortgage crisis and financial crises. These may also broadly be classed as "supply-side" and "demand-side" explanations: This debate has important policy consequences: This division is not absolute — some classicals including Say argued for government policy to mitigate the damage of economic cycles, despite believing in external causes, while Austrian School economists argue against government involvement as only worsening crises, despite believing in internal causes.
The view of the economic cycle as caused exogenously dates to Say's lawand much debate on endogeneity or exogeneity of causes of the economic cycle is framed in terms of refuting or supporting Say's law; this is also referred to as the " general glut " supply in relation to demand debate.
Until the Keynesian revolution in mainstream economics in the wake of the Great Depressionclassical and neoclassical explanations exogenous causes were the mainstream explanation of economic cycles; following the Keynesian revolution, neoclassical macroeconomics was largely rejected.
There has been some resurgence of neoclassical approaches in the form of real business cycle RBC theory. The debate between Keynesians and neo-classical advocates was reawakened following the recession of Mainstream economists working in the neoclassical tradition, as opposed to the Keynesian tradition, have usually viewed the departures of the harmonic working of the market economy as due to exogenous influences, such as the State or its regulations, labor unions, business monopolies, or shocks due to technology or natural causes.
Keynesian[ edit ] According to Keynesian economicsfluctuations in aggregate demand cause the economy to come to short run equilibrium at levels that are different from the full employment rate of output. These fluctuations express themselves as the observed business cycles. Keynesian models do not necessarily imply periodic business cycles. However, simple Keynesian models involving the interaction of the Keynesian multiplier and accelerator give rise to cyclical responses to initial shocks.
Paul Samuelson 's "oscillator model"  is supposed to account for business cycles thanks to the multiplier and the accelerator. The amplitude of the variations in economic output depends on the level of the investment, for investment determines the level of aggregate output multiplierand is determined by aggregate demand accelerator. In the Keynesian tradition, Richard Goodwin  accounts for cycles in output by the distribution of income between business profits and workers' wages.
The fluctuations in wages are almost the same as in the level of employment wage cycle lags one period behind the employment cyclefor when the economy is at high employment, workers are able to demand rises in wages, whereas in periods of high unemployment, wages tend to fall. According to Goodwin, when unemployment and business profits rise, the output rises.
Credit cycle and Debt deflation One alternative theory is that the primary cause of economic cycles is due to the credit cycle: In particular, the bursting of speculative bubbles is seen as the proximate cause of depressions, and this theory places finance and banks at the center of the business cycle. A primary theory in this vein is the debt deflation theory of Irving Fisherwhich he proposed to explain the Great Depression.
A more recent complementary theory is the Financial Instability Hypothesis of Hyman Minskyand the credit theory of economic cycles is often associated with Post-Keynesian economics such as Steve Keen.
Post-Keynesian economist Hyman Minsky has proposed an explanation of cycles founded on fluctuations in credit, interest rates and financial frailty, called the Financial Instability Hypothesis.
In an expansion period, interest rates are low and companies easily borrow money from banks to invest.
Banks are not reluctant to grant them loans, because expanding economic activity allows business increasing cash flows and therefore they will be able to easily pay back the loans.
This process leads to firms becoming excessively indebted, so that they stop investing, and the economy goes into recession. Real business cycle theory[ edit ] Main article: Policies that help reduce mortgage debt or household leverage could therefore have stimulative effects. In theory, near-zero interest rates should encourage firms and consumers to borrow and spend. However, if too many individuals or corporations focus on saving or paying down debt rather than spending, lower interest rates have less effect on investment and consumption behavior; the lower interest rates are like " pushing on a string.
One remedy to a liquidity trap is expanding the money supply via quantitative easing or other techniques in which money is effectively printed to purchase assets, thereby creating inflationary expectations that cause savers to begin spending again. Government stimulus spending and mercantilist policies to stimulate exports and reduce imports are other techniques to stimulate demand.
Too many consumers attempting to save or pay down debt simultaneously is called the paradox of thrift and can cause or deepen a recession. Economist Hyman Minsky also described a "paradox of deleveraging" as financial institutions that have too much leverage debt relative to equity cannot all de-leverage simultaneously without significant declines in the value of their assets.
The recession, in turn, deepened the credit crunch as demand and employment fell, and credit losses of financial institutions surged. Indeed, we have been in the grips of precisely this adverse feedback loop for more than a year.
Recession - Wikipedia
A process of balance sheet deleveraging has spread to nearly every corner of the economy. Consumers are pulling back on purchases, especially on durable goods, to build their savings. Businesses are cancelling planned investments and laying off workers to preserve cash. And, financial institutions are shrinking assets to bolster capital and improve their chances of weathering the current storm.
Once again, Minsky understood this dynamic. He spoke of the paradox of deleveraging, in which precautions that may be smart for individuals and firms—and indeed essential to return the economy to a normal state—nevertheless magnify the distress of the economy as a whole. Wright, uses yields on year and three-month Treasury securities as well as the Fed's overnight funds rate. It is, however, not a definite indicator;  The three-month change in the unemployment rate and initial jobless claims.
Analysis by Prakash Loungani of the International Monetary Fund found that only two of the sixty recessions around the world during the s had been predicted by a consensus of economists one year earlier, while there were zero consensus predictions one year earlier for the 49 recessions during Stabilization policy Most mainstream economists believe that recessions are caused by inadequate aggregate demand in the economy, and favor the use of expansionary macroeconomic policy during recessions.
Strategies favored for moving an economy out of a recession vary depending on which economic school the policymakers follow. Monetarists would favor the use of expansionary monetary policywhile Keynesian economists may advocate increased government spending to spark economic growth.
Supply-side economists may suggest tax cuts to promote business capital investment. When interest rates reach the boundary of an interest rate of zero percent zero interest-rate policy conventional monetary policy can no longer be used and government must use other measures to stimulate recovery.
Keynesians argue that fiscal policy —tax cuts or increased government spending—works when monetary policy fails. Spending is more effective because of its larger multiplier but tax cuts take effect faster.
For example, Paul Krugman wrote in December that significant, sustained government spending was necessary because indebted households were paying down debts and unable to carry the U.