"Theory and History Behind Business Cycles: Are the 1990s the
Onset of a Golden Age?"
BY: VICTOR ZARNOWITZ
FIBER, Inc.
Paper ID: NBER Working Paper No. 7010
Date: March 1999
Contact: VICTOR ZARNOWITZ
Email: Mailto:victor.zarnowitz at gsb.uchicago.edu
Postal: FIBER, Inc.
122 East 42nd Street
Suite 1512
New York, NY 10168 USA
Phone: (212)983-2222
Fax: (212)972-0567
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ABSTRACT:
The disputes over the prospects for the current U.S. expansion
reopen the issue of the causes of business cycles. A recurrent
concern about the present is that expectations of business
profits and market returns may be outrunning the economy's
potential to deliver. The theory presented in this paper ties
together profits, investment, credit, stock prices, inflation
and interest rates. I discuss new estimates of profit and
investment functions with important roles for growth of demand
and productivity, price and cost levels, risk perception, credit
volume and credit difficulties. The relationships among these
endogenous variables are viewed as constituting an enduring core
of business cycles, the exogenous shocks and policy effects as
more transitory and peripheral. The U.S. upswing of the past
three years provides a vivid example of how profits, investment,
and an exuberant stock market can reinforce each other. Long
business expansions benefit society in several ways, but they
generate imbalances and are difficult to sustain. Recent events
in Asia demonstrate how investment-driven booms can give way to
a protracted stagnation with tendencies toward deflation and
underconsumption or to severe depressions. After a deterioration
in the 1970s and early 1980s, U.S. business cycles moderated
again, as in the first two post-WWII decades. But globally
recessions became more frequent and more severe in the second
half of the postwar era. The arguments in favor a new Golden Age
are generally not persuasive.
JEL Classification: E3, E30, E31, E32