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Business Cycles : Evidence, Theory, and Policy

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Ups and downs in an economy are a natural occurrence, similar to periods of health and activity or times of slowdown or even sickness in a human body. This feature of the economy has for decades been a preoccupation of economists and many theories have been suggested to explain them. Many also have tried to devise methods for forecasting the onset of a recession or the beginning of a recovery. As discussed in Chap. 1, since the Great Depression many economists have tried to come up with policies that could avoid recession or at least ameliorate its effects so that the economy would experience a soft landing (presumably as opposed to a crash landing).

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But another indictment stands against the vast majority of the economists of that period [1870–1914] if it be indeed proper, considering the analytic situation in which they worked, to call it an indictment: with few exceptions, of which Marx was the most influential one, they treated cycles as a phenomenon that is superimposed upon the normal course of capitalist life and mostly as a pathological one; it never occurred to the majority to look to business cycles for material with which to build the fundamental theory of capitalist reality.Joseph Schumpeter , History of Economic Analysis, 1954,p. 1135

Like waves of the sea, our rest is our extinction

We are alive because we are restlessKalim Kashani

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Notes

  1. 1.

    Roger W. Babson (1910), pp. 111–134.

  2. 2.

    James H. Brookmire (1913), pp. 43–58.

  3. 3.

    Warren M. Persons (1916), pp. 739–769.

  4. 4.

    Warren M. Persons (1920), pp. 39–48; (1927), pp. 20–29; see also the reference in footnote 3 above.

  5. 5.

    Geoffrey H. Moore (1975), pp. 17–23.

  6. 6.

    Ragnar Frisch (1933), reprinted 1967, pp. 171–205.

  7. 7.

    Albert Aftalion (1927), pp. 165–170.

  8. 8.

    Later on Frisch and Harold Holme published “The Characteristic Solutions of a Mixed Difference and Differential Equations Occurring in Economic Dynamics,” Econometrica, 1935, pp. 225–239 to help readers with the technical points in the previous article.

  9. 9.

    Ibid., p. 173.

  10. 10.

    For an appreciation of his work see Kenneth Arrow (1960), pp. 175–192; and Leif Johansen (1969), pp. 302–324.

  11. 11.

    For a discussion of difference equations and their solutions see Dadkhah (2007), Chap. 14.

  12. 12.

    The original model of Kydland and Prescott (1982) is much more elaborate. It includes gestation lags in capital formation, production depends on inventories, technology shocks are of three different varieties, and leisure appears in the utility function in a distributed lag format. The present model is based on their expository paper: “The Computational Experiment: An Econometric Tool,” Journal of Economic Perspectives, 1996, pp. 69–85.

  13. 13.

    See for example, Thomas Lubik and Frank Schorfheide (2004), pp. 190–217; Frank Smets and Rafael Wouters (2005), pp. 422–433; Malin Adolfson et al. (2005), pp. 444–457; and Jean-philippe Laforte (2007), pp. 127–154.

  14. 14.

    For a more detailed discussion of the New Keynesian models see Olivier Blanchard and Stanley Fischer (1989), Chaps. 8 and 9; Gregory Mankiw and David Romer (1991); and David Romer (2006), Chap. 6.

  15. 15.

    See Michael Wickens (2008), Chap. 9.

  16. 16.

    Lawrence Christiano et al. (2005), pp. 1–45.

  17. 17.

    Richard Clarida et al. (1999), pp. 1661–1707.

  18. 18.

    David Altig et al. (2005).

  19. 19.

    Michael Woodford (2009), pp. 267–279, who argues that the DSGE models are being used for policy analysis by the IMF , the European Central Bank , and other European banks.

  20. 20.

    V. Chari et al. (2009), pp. 242–266.

  21. 21.

    For example Gregory Mankiw (2006), pp. 29–46. See also Woodford, op. cit., who argues that the DSGE models are being used for policy analysis by the IMF , the European Central Bank , and other European banks.

  22. 22.

    This is not a typo, it is the way Hayek used it.

  23. 23.

    Finn Kydland and Edward Prescott (1996), p. 83.

  24. 24.

    Milton Friedman (1953b), p. 282.

  25. 25.

    Op. cit. p. 283.

  26. 26.

    Ibid.

  27. 27.

    Jesper Lindé (2001), pp. 986–1005.

  28. 28.

    V. Chari and Patrick Kehoe (2006), pp. 3–28.

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Dadkhah, K. (2009). Business Cycles : Evidence, Theory, and Policy. In: The Evolution of Macroeconomic Theory and Policy. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-540-77008-4_8

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