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Monday, February 08, 2016

'Will the Economic Recovery Die of Old Age?'

Glenn Rudebusch

Will the Economic Recovery Die of Old Age?. SF Fed Economic Letter: Recent economic indicators show that U.S. economic growth has slowed considerably. After adjusting for inflation, aggregate output increased little during the final three months of 2015. Is this the start of a serious stumble by an aging economy with creaky knees? Are we due for a recession? Or is the slowdown just part of the normal ups and downs of a healthy, dynamic economy?
Recessions are notoriously difficult to forecast. However, much conventional wisdom views an aging expansion as increasingly fragile and more likely to end in recession. The associated predictions of recession—proclaiming that “it’s about time” for a downturn—have become more prominent lately because the current recovery, which started six and a half years ago, is relatively long already. ...
The notion that business expansions are more likely to end as they grow older was especially common before World War II. Gottfried Haberler’s (1937) classic synthesis of prewar business cycle theories devotes an entire section to the topic: “Why the Economic System Becomes Less and Less Capable of Withstanding Deflationary Shocks After an Expansion Has Progressed Beyond a Certain Point.” Nowadays, the underlying rationale for this view follows an analogy to human mortality: As the expansion ages, assorted imbalances and rigidities accumulate that hobble the economy and make it more fragile. Thus, the recovery could be jeopardized by ever smaller shocks, and it becomes more likely over time that the economy will fall into recession.
However, the historical record since World War II does not support the view that the probability of recession increases with the length of the recovery. The earliest statistical investigation of the issue by Diebold and Rudebusch (1990) found that postwar expansions were not more likely to end as they endured. This Economic Letter updates that analysis. The results concur with Yellen’s view that, all else equal, longer expansions are no more likely to end than shorter ones. ...

    Posted by on Monday, February 8, 2016 at 10:38 AM in Economics | Permalink  Comments (33)


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