Recession: When Bad Times Prevail - Back to Basics: Finance & Development
The NBER's Business Cycle Dating Committee defines a recession as “a involves establishing a broad decline in economic activity over an extended period of. Nov 29, Business cycles--the combination of expansion and recession--are irregular cycles in an unofficial group, the Business Cycle Dating Committee of the for economic peaks and troughs, with recession defined as the period. Aug 7, The CEPR Euro Area Business Cycle Dating Committee, which is This post- recession recovery is commensurate with that of the US recovery.
Despite zero interest rates and expansion of the money supply to encourage borrowing, Japanese corporations in aggregate opted to pay down their debts from their own business earnings rather than borrow to invest as firms typically do.
Euro Area Business Cycle Dating Committee | Centre for Economic Policy Research
Japanese firms overall became net savers afteras opposed to borrowers. Koo argues that it was massive fiscal stimulus borrowing and spending by the government that offset this decline and enabled Japan to maintain its level of GDP.
In his view, this avoided a U. He argued that monetary policy was ineffective because there was limited demand for funds while firms paid down their liabilities.
In a balance sheet recession, GDP declines by the amount of debt repayment and un-borrowed individual savings, leaving government stimulus spending as the primary remedy. However, Krugman argued that monetary policy could also affect savings behavior, as inflation or credible promises of future inflation generating negative real interest rates would encourage less savings.
In other words, people would tend to spend more rather than save if they believe inflation is on the horizon.What Is The Peak Of The Business Cycle?
In more technical terms, Krugman argues that the private sector savings curve is elastic even during a balance sheet recession responsive to changes in real interest rates disagreeing with Koo's view that it is inelastic non-responsive to changes in real interest rates. Both durable and non-durable goods consumption declined as households moved from low to high leverage with the decline in property values experienced during the subprime mortgage crisis.
Further, reduced consumption due to higher household leverage can account for a significant decline in employment levels. Policies that help reduce mortgage debt or household leverage could therefore have stimulative effects. In theory, near-zero interest rates should encourage firms and consumers to borrow and spend. However, if too many individuals or corporations focus on saving or paying down debt rather than spending, lower interest rates have less effect on investment and consumption behavior; the lower interest rates are like " pushing on a string.
One remedy to a liquidity trap is expanding the money supply via quantitative easing or other techniques in which money is effectively printed to purchase assets, thereby creating inflationary expectations that cause savers to begin spending again. Government stimulus spending and mercantilist policies to stimulate exports and reduce imports are other techniques to stimulate demand. Too many consumers attempting to save or pay down debt simultaneously is called the paradox of thrift and can cause or deepen a recession.
Economist Hyman Minsky also described a "paradox of deleveraging" as financial institutions that have too much leverage debt relative to equity cannot all de-leverage simultaneously without significant declines in the value of their assets. The recession, in turn, deepened the credit crunch as demand and employment fell, and credit losses of financial institutions surged. Indeed, we have been in the grips of precisely this adverse feedback loop for more than a year.
Euro Area Business Cycle Dating Committee
A process of balance sheet deleveraging has spread to nearly every corner of the economy. Consumers are pulling back on purchases, especially on durable goods, to build their savings. Businesses are cancelling planned investments and laying off workers to preserve cash.
And, financial institutions are shrinking assets to bolster capital and improve their chances of weathering the current storm. Once again, Minsky understood this dynamic.
He spoke of the paradox of deleveraging, in which precautions that may be smart for individuals and firms—and indeed essential to return the economy to a normal state—nevertheless magnify the distress of the economy as a whole. Although this definition is a useful rule of thumb, it has drawbacks.
A focus on GDP alone is narrow, and it is often better to consider a wider set of measures of economic activity to determine whether a country is indeed suffering a recession. Using other indicators can also provide a timelier gauge of the state of the economy.
A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Although an economy can show signs of weakening months before a recession begins, the process of determining whether a country is in a true recession often takes time.
For example, it took the NBER committee a year to announce the beginning and end dates of the most recent U.
The decision process involves establishing a broad decline in economic activity over an extended period of time, after compiling and sifting through many variables, which are often subject to revisions after their initial announcement.
In addition, different measures of activity may exhibit conflicting behavior, making it difficult to identify whether the country is indeed suffering from a broad-based decline in economic activity. Why do recessions happen? Understanding the sources of recessions has been one of the enduring areas of research in economics. There are a variety of reasons recessions take place. Some are associated with sharp changes in the prices of the inputs used in producing goods and services.
For example, a steep increase in oil prices can be a harbinger of a recession. As energy becomes expensive, it pushes up the overall price levelleading to a decline in aggregate demand. When used excessively, such policies can lead to a decline in demand for goods and services, eventually resulting in a recession. Other recessions, such as the one that began inare rooted in financial market problems. Sharp increases in asset prices and a speedy expansion of credit often coincide with rapid accumulation of debt.
Because a recession influences the economy broadly and is not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The traditional role of the committee is to maintain a monthly chronology, so the committee refers almost exclusively to monthly indicators.
The committee gives relatively little weight to real GDP because it is only measured quarterly and it is subject to continuing, large revisions. The broadest monthly indicator is employment in the entire economy. The committee generally also studies another monthly indicator of economy-wide activity, personal income less transfer payments, in real terms, adjusted for price changes. In addition, the committee refers to two indicators with coverage of manufacturing and goods: Graphical Illustration The chart below shows the behavior over the business cycle of the monthly annualized growth rate for seasonally adjusted payroll employment.
The gray bars represent periods of recession defined by the NBER—payroll employment growth is typically negative during recessions. It Takes Time to Make the Call The Business Cycle Dating Committee typically waits to get revised data and have a more complete picture of economic conditions before deciding on the peaks and troughs of the business cycle. For example, the committee did not announce the March peak and the onset of the recession until November 26,