Business Cycles: Real Facts and a Monetary Myth

Abstract

This paper argues that the reporting of facts in light of theory fosters the development of theory. Dynamic neoclassical macro theory guided the selection of facts to report. The hope is that these facts will foster the further development of this theory. A finding is thatthe price level is countercyclical in the post-Korean War period. This finding debunks the myths that the price level is procyclical,with the postwar period being no exception. Conclusion Let us reemphasize that, unlke Burns and Mitchell, we are not claiming to measure business cycles. We also think it inadvisable to start our economics from some statistical definition of trend and deviation from trend, with growth theory being concerned with trend and business cycle theory with deviations. Growth theory deals with both trend and deviations. The statistics we report are of interest, given neoclassical growth theory, because they are - or maybe were - in apparent conflict with that theory. Documenting real or apparent systematic deviations from theory is a legitimate activity in the natural sciences and should be so in economics as well. We hope that the facts reported here will help guide the selection of model economies to study. We caution that any theory in which procyclical prices figure crucially in accounting for postwar business cycle fluctuations is doomed to failure. The facts we report indicate thta the price level since the Korean War moves countercyclically. The fact that the transaction component of real cash balances (M1) moves contemporaneously with the cycle while the much larger nontransaction component (M2) leads the cycle suggests that credit arrangements could play a significant role in future business cycle theory. Introducing money and credit into growth theory in a way that accounts for the cyclical behaviour of monetary as well as real aggregates is an important open problem in economics.