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Thursday, November 05, 2015

'Business Cycle Theory vs. Growth Theory'

Nick Rowe:

Business cycle theory vs growth theory: Macroeconomics is divided into (short run) business cycle theory and (long run) growth theory.
Those of us who do business cycle theory have a bit of an inferiority complex (though you might not know it from listening to us argue). Because growth theory seems to be so much more important. Where would you rather live: in a rich country during a recession; or in a poor country during a boom? (Watch the flows of people voting or attempting to vote with their feet if you are not sure how most people would answer.) In the long run, productivity is about the only thing that matters.
We would feel better about ourselves, and what we are studying and teaching, if we could argue that taming the business cycle would improve long run growth.
Notice that I have deliberately personalised this question to make you aware of my personal bias. Macroeconomists like me, who do short run business cycle theory, want to think that what we are doing is important. We want to argue that taming the business cycle would improve long run growth.
(The Great Recession was great for my sort of macro; we haven't had so much fun since the 1970's. The Great Moderation was a boring time for macroeconomists like me, when we seemed to be victims of our own success; all the growth theorists were stealing our limelight.)
Why might business cycles lower the long run growth rate? ...

    Posted by on Thursday, November 5, 2015 at 10:43 AM in Economics, Macroeconomics | Permalink  Comments (6)


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