Journal Article

What's real about the business cycle?

Abstract: This paper argues that a linear statistical model with homoskedastic errors cannot capture the nineteenth-century notion of a recurring cyclical pattern in key economic aggregates. A simple nonlinear alternative is proposed and used to illustrate that the dynamic behavior of unemployment seems to change over the business cycle, with the unemployment rate rising more quickly than it falls. Furthermore, many but not all economic downturns are also accompanied by a dramatic change in the dynamic behavior of short-term interest rates. It is suggested that these nonlinearities are most naturally interpreted as resulting from short-run failures in the employment and credit markets and that understanding these short-run failures is the key to understanding the nature of the business cycle.

Keywords: Unemployment; Interest rates; Business cycles;

Status: Published in Proceedings of the Twenty-Ninth Annual Economic Policy Conference of the Federal Reserve Bank of St. Louis : Productivity, Labor, and the Business Cycle

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Review

Publication Date: 2005

Volume: 87

Issue: Jul

Pages: 435-452