Business Cycles

Business Cycles

The term ‘business cycles’ refers to the perpetual interchanging of economic growth (expansion) with stagnation (recession). Consistently, with this idea, roughly every 5 to 10 years the cycle repeats itself. Cyclical business behaviour, along with investment and productivity shocks, is of interest to economists. However, just as with ceteris paribus, the points made often rest on important assumptions.

Because of the repercussions of globalization, business cycles may have become synchronized. Such synchronization would have occurred between European and Anglophone countries in 1950-1973, and then intensified. However, after analyzing yearly Gross Domestic Product (GDP) for 25 economies over 125 years, the researchers concluded that shocks within, or particular to, the country, are more important in affecting business cycle processes than all other factors. Considerable academic disagreement surrounds the issue. A proposition has been advanced that despite the Euro replacing national currencies in 1999, a European simultaneous cycling has been documented as far back as the 1980s. Yet, others maintain conviction that the exact reverse actually happened. In exploring the impact of globalization on economic cycles, the author defines the first wave of the phenomenon as taking place between 1880-1913. The period from 1973 onwards would be the fourth such wave, featuring financial market integration and selected floating exchange rates.

Internal factors, such as harvests, have considerable influence over business cycle dynamics. As an example let’s quote Davis et al. (2011) who reviews the cotton industry activities in 19th century America and compares the antebellum and postbellum periods.

Un stade. I hate weekends because there is no stock market (Rene Rivkin). Photo: Megan Jorgensen (Elena)

Because volume shifts were unique to that particular crop in the precise lapse of time, the illustration is a classical illustration for the Keynesian model under the gold standard. The gold standard is a monetary system where the unit of measurement is a predetermined amount of gold. Cotton, wheat and corn are the three principal crops of the U.S. agricultural and industrial production markets.

Together, they account for a fundamental part of the country’s GDP. In that moment in time, corn was the least exported product of the trio, and almost ¾ of wheat produce came from the following states: Ohio, Michigan, Illinois, Wisconsin, Minnesota, Indiana, Missouri, the Dakotas, Kansas and Nebraska. Crop production ascribed coalitions of states names such as Southern Wheat Belt and Midwestern Corn Belt (reminiscent of, and overlapping with, the Bible Belt).

The Keynesian economic business cycle model states that fiscal policy ought to be countercyclical. Fiscal policy refers to government and taxes, while monetary policy has to do with the central bank, and thus interest rates and money supply stabilization tools.

References:

Artis, M., Chouliarakis, G. & Harischandra, P. K. G. (2011). Busyness cycle synchronisation since 1880. The Manchester School, 79 (2): 173-207.

Chari V. V., Christiano, L. J. & Kehoe, P. J. (1994). Optimal fiscal policy in a business cycle model. The Journal of Political Economy, 102 (4): 617-652.

Davis, J. H., Hanes, C. & Rhode, P. W. (2011). Harvests and business cycles in nineteenth century America. The Quarterly Journal of Economics, 124 (4): 1675-1727.