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52

u 5500 -S 5000 -2 4500 -4000-

1 3500 -15 3000 -

2 2500

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 FIGURE 4.1 U.S. real GDP, 1947-1994 (data from Citibase)

five quarters in 1980-1981 to nine years in 1960-1969 and in 1982-1991. Tfie patterns of tfie output declines also vary greatly. In the 1980 recession, the full decline of 2.6% took place in a single quarter; in the 1990-1991 recession, the decline of 1.6% took place gradually over three quarters; and in the 1973-1975 recession, output fell irregularly by a total of 1.9% over four quarters and then dropped 2.2% in the final quarter of the recession.

Because output movements are not regular, modern macroeconomics has generally turned away from attempts to interpret fluctuations as combinations of deterministic cycles of different lengths; efforts to discern regular Kitchin (3-year), Juglar (10-year), Kuznets (20-year), and Kondratiev (50-year) cycles have been largely abandoned as unproductive. Instead,

TABLE 4.1 Recessions in the United States since World War II

Year and quarter

Number of quarters until

Change in real GDP,

of peak in real GDP

Urougli in real GDP

peak to trough

1948:4

1.1%

1953:2

-2.2

1957:3

-3.3

1960:1

-0.8

1969:3

-0.9

1973:4

-4.1

1980:1

-2.6

1981:3

-2.8

1990:2

-1.6

Source: Citibase.

There is an important exception to the claim that fluctuations are irregular: there are large seasonal fluctuations that are similar in many ways to conventional business-cycle fluctuations. See Barsky and Miron (1989).



Durables

6.9%

8.7;

Nondurables

24.8

14.3

Services

31.3

Investment

Residential

14.7

Fixed nonresidential

10.1

21.1

Inventories

,0.6

30.7

Net Exports

-0.6

Government purchases

21.8

Source: Citibase.

the prevailing view is that the economy is perturbed by disturbances of various types and sizes at more or less random intervals, and that those disturbances then propagate through the economy. Where the major macro-economic schools of thought differ is in their hypotheses concerning these shocks and propagation mechanisms.

A second important fact is that fluctuations are distributed very unevenly over the components of output. Table 4.2 shows both the average shares of each of the components in total output and their average shares in the declines in output (relative to its normal growth) in recessions. As the table shows, even though inventory investment on average accounts for only a trivial fraction of GDP, its fluctuations account for almost one-third of the shortfaU in growth relative to normal in recessions: inventory accumulation is on average large and positive at peaks, and large and negative at troughs. Residential investment (that is, housing) and nonresidential fixed investment (that is, business investment other than inventories) also account for disproportionate shares of output fluctuations; the same is true, to a lesser extent, of consumer purchases of durable goods. Finally, consumer purchases of nondurables and services, government purchases, and net exports are relatively stable. Although there is some variation across recessions, the general pattern shown in Table 4.2 holds in most. And the same components that decline disproportionately when aggregate output is falling also rise disproportionately when output is growing at above-normal rates.

A third set of facts involves asymmetries in output movements. There are no large asymmetries between rises and falls in output; that is, output growth is distributed roughly symmetrically around its mean. There does.

The entries for net exports indicate that they are on average negative over the postwar period, and that they typically grow-that is, become less negative-during recessions.

TABLE 4.2 Behavior of the components of output in recessions

Average share in fall Average share in GDP in recessions Component of GDP in GDP relative to normal growth

Consumption



More precisely, periods of extremely low growth quickly followed by extremely high growth are much more common than periods exhibiting the reverse pattern. See, for example, De Long and Summers (1986a); Sichel (1993); Beaudry and Koop (1993); and McQueen and Thorley (1993).

= See Balke and Gordon (1989) and Sheffrin (1988) for further discussion of pre-Depression versus post-World War 11 fluctuations.

For two recent discussions of the status of our understanding of the Great Depression, see C. Romer (1993) and Bernankes (1993) review of Eichengreen (1992).

however, appear to be asymmetry of a second type: output seems to be characterized by relatively long periods when it is slightly above its usual path, interrupted by brief periods when it is relatively far below.

A fourth set of facts concerns the nature of output fluctuations before the postwar era. In a series of papers, C. Romer (1986a, 1986b, 1989, 1994) demonstrates that there are important biases in traditional estimates of major macroeconomic time series for the period before World War 11. She shows that once those biases are accounted for, aggregate fluctuations do not appear dramatically different before the Great Depression than after World \\ ar II. Output movements in the era before the depression appear slightly larger, and slightly less persistent; but there has been no sharp change in the character of fluctuations. Since such features of the economy as the sectoral composition of output and role of government were very different in the two eras, this suggests either that the character of fluctuations is determined by forces that have changed much less over time, or that there have been a set of changes to the economy that have had roughly offsetting effects on overall fluctuations.

A corollary of these findings about output movements before the Great Depression is that the collapse in the depression and the rebound of the 1930s and World War II dwarf any fluctuations before or since. Real GDP in the United States fell by 30% between 1929 and 1933, with estimated unemployment reaching 25% in 1933. Over the next 11 years, real GDP rose at an average annual rate of 10%; as a result, unemployment in 1944 was 1.2%. Finally, real GDP declined by 23% between 1944 and 1947, and unemployment rose to 3.9%. In contrast, Romers (1989) estimates imply that the largest decline in real GNP in the period 1869-1929 was a fall of 4.2% from 1907 to 1908. And as described above, the largest postwar decline has been 4.1% in 1973-1975. Likewise, the tremendous output gains of 1933-1944, and the remarkable unemployment rates of both the early 1930s and the mid-1940s, are unparalleled in the historical record.

Finally, Table 4.3 summarizes the behavior of some important macroeconomic variables during recessions. Not surprisingly, employment falls and unemployment rises during recessions. The table shows that, in addition, the length of the average workweek falls. The declines in employment and hours are generally small relative to the falls in output. Thus productivity -output per worker-hour-generally declines during recessions. The conjunction of the dechnes in productivity and hours implies that movements



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