We have come full circle with business cycle analysis. There was a period in the late 1990’s when many thought the business cycle was dead. Of course, there were financial crises like LTCM and financial issues with emerging markets but the traditional long swings were over.
“The waves of the business cycle are becoming ripples” Foreign Affairs 1990’s
The end of the business cycle was manifested in the conclusion that the period from mid 1980’s through 2005 was the “Great Moderation” as coined by a rising Fed official.
“The Great Moderation” argument by Ben Bernanke 2004
The period of Great Moderation was even discussed as late as 2007.
“Welcome to the “Great Moderation”. Historians will marvel at the stability of our era.” Gerard Baker, NY Times, 1/19/2007
The Great Moderation was believed to be driven by a period of very good monetary policy. Not the same old Keynesian economics, but certainly not the passive monetary aggregate approach. Inflation targeting was the fad up until this quarter.
“We are all Keynesian now.” attributed to Richard Nixon 1972 but more likely stated by Milton Friedman.
The Great Moderation allowed us to increase our confidence in central bankers, yet now there is growing fear that central bankers are unsure of what policy to follow as they explode their balance sheets.
“We would be well-advised to put our money on the theory that our central bankers today are more skilled, more far-sighted, and less prone to either short-sightedly jerking themselves around or being jerked around by political masters who unpredictably change the objectives they are supposed to pursue year after year.” Brad Delong July 2007
What is clear is that the Great Moderation is over and the larger and more volatile swings in the business cycle are more likely to be the norm.
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