Monday, February 27, 2017

Krugman on Two Kinds of Recession

Paul Krugman in Postmodern Business Cycles:

... there’s a definite change in the character of recessions after the mid-1980s. Before then, recessions were basically brought on by the Fed, which raised interest rates sharply to curb inflation ...

Since then, however, inflation has been well under control, and booms have died of old age — or more precisely, they have died because of overbuilding and an excessive level of debt.

Krugman in Postmodern recessions:

A lot of what we think we know about recession and recovery comes from the experience of the 70s and 80s. But the recessions of that era were very different from the recessions since. Each of the slumps — 1969-70, 1973-75, and the double-dip slump from 1979 to 1982 — were caused, basically, by high interest rates imposed by the Fed to control inflation...

Since the mid 1980s, however, we’ve had the “Great Moderation,” with inflation quiescent. Post-moderation recessions haven’t been deliberately engineered by the Fed, they just happen when credit bubbles or other things get out of hand.

1 comment:

The Arthurian said...

See Timothy Taylor
From What Direction is the Next Recession Coming?

"... The clear implication from this earlier line of thought is that recessions don't occur just because a recovery has gone on for a long time: instead, recessions are caused when the Fed decides to dampen inflation... But the last few recessions haven't really followed this narrative. Sure, you can see just a little belch of inflation circa 2007, but the Great Recession was at its root a financial crises tracing back to financialization of mortgage securities and a boom-and-bust in housing prices. Similarly, you can see a little burp of inflation back around 2000, but the recession of 2000-2001 was about the end of the dot-com boom, with a drop in the stock market and an accompanying fall in real investment. Even going back to the 1990-91 recession, there is again a small hop in inflation beforehand, that recession was also related to a boom-and-bust in certain regional housing markets and linked to the widespread failures across the saving-and-loan industry."