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Business Cycles: Theory, History, Indicators, and Forecasting.

Over the past two centuries, business cycles have varied greatly in length, spread, and size. At the same time, they are distinguished by their recurrence, persistence, and pervasiveness. In recent years questions about the changing nature of business cycles have increasingly become a focus of academic interest and public concern. Victor Zarnowitz has long been considered a leading figure in the study of business cycles. The collection of papers in this book represent a carefully integrated and up-to-date study of business cycles, reexamining some of his earlier research as well as addressing recent developments in this area.

During the last few decades, the NBER has sponsored a great deal of important research on business cycle fluctuations. This book, published by the NBER, includes findings that have been reported in many published research papers and conference volumes. A nice introduction by the author summarizes and serves as a road map for readers. Thereafter the papers are organized around four general themes--theory, history, indicators, and forecasting. The book first delineates what we know and still do not know about business cycles. These facts are then assessed in light of the theoretical literature on fluctuations in economic activity. The book consists of eighteen chapters divided into four sections. Two of the chapters are joint products of work with other co-authors. Most of these chapters, whether addressing problems of theory, evidence, indicators, or prediction, are rather comprehensive in scope. This, in my view, reflects a gradual expansion of the author's research interests from particular cyclical processes, events, and hypotheses to the long history and modern evolution of business cycles.

In the first section, Zarnowitz reviews various business cycle theories including the Keynesian and monetary theories, rational expectations and real business cycle theories. In doing so, he investigates how business cycles have evolved over time in response to changes in the size of the government, nature of stabilization policies, and the degree of openness of an economy. In the next section, Zarnowitz discusses various measures of the trends and cycles in economic activity, such as, output, prices, inventories, residential and non-residential investments, and other economic variables. He examines the length and severity of U.S. business cycles since the early nineteenth century and evaluates the success of macro models in simulating the past behavior of the economy.

The chapters in the third section are purely empirical in nature. The performances of various leading, coincident, and lagging indicators are described and assessed and results on the value of their composite measures are presented. Finally, the chapters in the last section offer a general assessment of the record and improvability of macroeconomic forecasting. The degree of success of large commercial forecasting firms and of many individual economists in predicting the course of inflation, real growth, unemployment, interest rates, and other key economic variables are assessed.

It is not possible in a brief review to summarize the developments in various aspects of business cycle discussed in considerable detail in individual chapters. Suffice it to say that there is a wealth of information documenting the importance of the widely different factors influencing business cycles. However, several overall conclusions can be derived from this book. First, growth in the United States and other market-oriented economies proceeded through nonperiodic but recurrent sequences of business expansions and contractions. The cycles have moderated in recent times and now show up more regularly in growth rates than in levels of total output and employment. This can be attributed to profound structural, institutional, and policy changes.

Second, business cycles are characteristically persistent and pervasive, interact with the longer growth trends. However, they are not mere transitory deviations from an independently determined long-term growth trend. Third, although the economy is always exposed to and affected by a variety of external disturbances, its major fluctuations are to a large extent of endogenous nature. Important interactions and cyclical movements occur among all key economic variables. These relationships are dynamic, involving distributed lags and probably also some essential nonlinearities. Fourth, the cyclically sensitive time series form a system of leading, coincident, and lagging indicators, consistent with long-established timing regularities. To aid macroeconomic analysis and forecasting, the cyclical indicators and indexes are best used in combination rather than individually.

The comprehensive and evolutionary view of business cycles that Zarnowitz holds does not by any means imply that contractions are inevitable or must recur with any frequency. In periods and countries with strong growth trends, recessions are typically short and mild. In fact, they are often replaced by retardation of real growth. Thus it is possible for a market-oriented economy to achieve both higher and more stable growth.

Zarnowitz focuses on the random elements in business cycles and the effects of various stabilization policies. This can serve at least two major purposes. First, there is a need to study what shocks impinge on the economy at various periods, with what frequency, persistence, and repercussions. Second, it is important to learn which policies can reduce and which can aggravate the cyclical instability of the economy, and when and how they do so.

This book is enjoyable to read and provides a good summary of empirical evidence and theoretical explanations for business cycles in the United States. Its approaches are totally free of the constraints of the analytical rituals that academicians often observe. Obviously, as with most complex economic phenomena, many questions about business cycles have not been answered definitively or remain unexplored. However, economic volatility in recent years have given us a good opportunity to improve our understanding of business cycles and this book, undoubtedly, makes a valuable contribution to this objective. The book is a good summary of research in the area of business cycle and it usefully incorporates interrelated pieces needed to understand the phenomenon. There are many nuggets of valuable information to be uncovered in this book, both by specialists in this area as well as novices. It should be read by all scholars interested in the use of economic data for the study of business cycle fluctuations. Zarnowitz is masterful in his analysis, and the book will set the standard in the business cycle literature for some time to come.
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Author:Chowdhury, Abdur R.
Publication:Southern Economic Journal
Article Type:Book Review
Date:Oct 1, 1993
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