South-Western College Publishing - Economics  

A Thing of the Past?
Subject Recessions
Topic Fiscal Policy, Monetary Policy
Key Words Expansion, Recession, Federal Reserve, Alan Greenspan, Interest Rates, Stock Markets, Economic Shocks
News Story Most economists would sign up to the statement that all economic expansions must end. The question is when. The average economic expansion in the post World War II era lasts about 54 months. Our current expansion, which began in 1991, is now 78 months old. Although this expansion is still not near the record of 106 months set in 1961-69, it has caused some to argue that recessions may be a thing of the past. Their arguments are aided by the absence of signs of a slowdown. This discussion points up the need to examine the views that people have about the signals of an end to the expansion and if there a difference between what people believe and actual experience.

It has been said that interest rate hikes by the Fed precede recessions. Economists believe that the Fed reacts to changes in the economy in order to prevent major problems rather than cause problems. To be sure, ill-timed or inappropriate responses can cause problems or make a bad situation worse. The current continued expansion might reflect an exceptional job by Alan Greenspan.

Others claim that where the stock market goes, the economy follows. Experience shows that not all stock market declines precede recessions. The stock market is therefore an unreliable predictor of recession.

Many believe that recessions are largely caused by economic shocks. Recent recessions have been the result of large supply-side shocks or dramatic reductions in consumer confidence, however, other supply-side shocks have not led to a recession. This suggests that shocks by themselves are not the cause. (Updated January 15, 1998)

  1. What are the phases of the business cycle?
  2. What are leading indicators? Give an example?
  3. What distinguishes an active from a passive monetary policy?
  4. Why are the existence and measurement of lags so important to a discussion of the active and passive approach?
Source Steven Pearlstein, "When Will the Economic Party End," The Washington Post, September 23,1997

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