Beyond Shocks: What Causes Business Cycles? an Overview

In the summer of 1997, when the Federal Reserve Bank of Boston selected the topic for its forty-second annual economic conference, many pundits were asking: “Is the business cycle dead, or at least permanently dampened?” By the time the Bank’s conference convened in June 1998, the same pundits queried: “What caused the massive recessions in Asia?” and “Can the United States remain ‘an oasis of prosperity,’ as Fed Chairman Alan Greenspan termed it, while economies worldwide are under siege from financial crises?” How quickly things change! Beyond Shocks: What Causes Business Cycles? turned out to be a particularly timely conference. Of course, the answers to the pundits’ questions are inextricably tied to an underlying fundamental question: What makes economies rise and fall? To determine whether the business cycle is dead, one must first determine whether economic fluctuations arise from the decisions of governments, financial market participants, and businesses, or simply from unexpected events (that is, “shocks”). To determine why Asian economies plunged into severe recession, it is necessary to understand how external pressures on vulnerable financial markets can lead to a sudden collapse, with severe consequences for nonfinancial sectors. And to determine whether the robust economic expansion in the United States will continue, it is necessary to evaluate how a slew of adverse economic factors, financial and real, could interact to end it. So, what caused the Asian crisis, the recessions of the 1970s and 1980s, and even the Great Depression? According to many modern