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«BEYOND SHOCKS: WHAT CAUSES BUSINESS CYCLES? AN OVERVIEW Jeffrey C. Fuhrer and Scott Schuh* In the summer of 1997, when the Federal Reserve Bank of ...»

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Mussa finds the two long historical analyses of business cycles to be inherently valuable. He particularly agrees with Temin’s premise that recessions “have a multiplicity of causes,” although he doubts that it is possible— or useful—to try to quantitatively separate causes into different categories of influence. Like Romer, Mussa believes that Temin underestimates the contribution of monetary policy to recessions. However, Mussa is cautious about the quality of older economic data and what we can reliably infer from them, particularly data for countries other than the United States.

Regarding the paper by Schuh and Triest on labor reallocation and business cycles, Mussa is “skeptical that labor reallocation is itself an independent cause of most U.S. business cycles.” He suggests that the authors focus more on the relationship between labor reallocation and the NAIRU (non-accelerating-inflation rate of unemployment). Regarding the central issue addressed in Basu’s paper, Mussa believes that “the notion that adverse downward movements in total technology cause recessions [because workers don’t work as hard] is just plain silly. This is the theory according to which the 1930s should be known not as the Great Depression but as the Great Vacation.” Mussa then turned to a discussion of current economic developments and the appropriateness of policy. On the domestic economy, Mussa likens recent monetary policy performance to the movie, “As Good As It Gets.” Aside from some minor quibbles, Mussa judges U.S.

30 Jeffrey C. Fuhrer and Scott Schuh monetary policy management during the last decade to be “remarkable” by any standard. But he notes that it has been “very good management with very good luck.” Moreover, he warns, to say that monetary policy has been as good as it gets implies that monetary policy is better than it is normally expected to be—in other words, it is likely to get worse, not better. Ultimately, the monetary authority cannot avoid all recessions; it can only be expected to avoid “big” ones.

On the international situation, Mussa likens catastrophic economic events such as the Great Depression and the current worldwide financial crisis to the movie “Titanic.” What caused the Titanic to sink, he asks?

Perhaps an exogenous shock (the iceberg), he quips. But it was more than that. Errors in the design and operation of the ship, inadequate preparation for the sinking, and other factors all contributed. In the same way, the current financial crisis has many complex causes and contributing factors.

However, reasons Mussa, the real tragedy of the Titanic was not that it sank and 1,500 lives were lost, but that 800 of the Titanic passengers were saved that day! Clearly this policy mistake discouraged shipbuilders from spending money on improving designs and shipping lines from bearing the cost of conducting safe navigation of future cruises across the Atlantic. The Titanic rescue demonstrated that entrepreneurs in the shipping industry didn’t need to worry about safety—they knew that the government would be there to save them from their imprudence!

Mussa employs this tongue-in-cheek argumentation to rebut those who argue that moral hazard problems should prevent the international community from responding to the current financial crisis. Despite moral hazard problems, saving 800 Titantic passengers was the right thing to do.

And despite clear moral hazard problems, Mussa says the IMF attempts to rescue Korea and other besieged economies is the right thing to do. He argues that IMF support is not a gift but a loan, and that the IMF’s earlier financial support of Mexico has been validated by Mexico’s successful servicing of IMF debt.

CONCLUSION In the end, most participants agreed that the business cycle is not dead but is likely here to stay. No one championed the ideas that a “new,” recession-proof economy has emerged, that unanticipated adverse economic events have stopped buffeting the economy, or that government policy has become so adroit that it can offset every dip in the aggregate economy. If anything, the mere mention of these ideas drew disdainful remarks, and even served as “proof” that the ideas were without merit.

Indeed, the general premise among participants was that the right question was when, not if, the next recession occurs, what will have caused it? The consensus answer is the cause is likely to be not one but


many things, with government policy and vulnerability playing important— but still not fully understood—roles.

Most participants also agreed that policymakers in a world continually subject to business cycles should adopt certain goals to improve their ability to deal with fluctuations. First, policymakers must learn how to recognize and address the economy’s vulnerability to disruptions and unanticipated events. Second, policy institutions should conduct and support research that shows the contribution of deliberate actions of economic agents to economic fluctuations. Finally, and most important, policymakers should understand that they cannot prevent every recession, but they should concentrate their efforts on averting The Big Ones,

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