Economic Fluctuations and Growth.

• Author: Hall, Robert E.
• Position: Program Report

The NBER's Research Program on Economic Fluctuations and Growth marks its 25th anniversary this year. During the long U.S. economic expansion of the 1990s--the longest in the chronology maintained by the NBER--topics related to growth played a large role in the Program's activities. With the onset of a recession in early 2001, research on economic fluctuations has gained additional attention.

The Business Cycle Dating Committee

The EFG Program hosts the Business Cycle Dating Committee which carries out a long-standing function of the NBER, the maintenance of a chronology of the U.S. business cycle. The Bureau began compiling the chronology in the early 1920s; it now covers almost a century and a half of business-cycle history. I chair the committee, which also, includes Martin Feldstein, Jeffrey A. Frankel, Robert J. Gordon, Christina D. Romer, David H. Romer, and Victor Zarnowitz.

On November 26, 2001, the committee announced that a recession had begun in the U.S. economy in March 2001. That is, a peak in economic activity occurred during March and the economy began to contract. A recession is a significant decline in activity spread across the economy, lasting more than a few months, visible in real gross domestic product, employment. and other indicators of activity. The committee determined in November 2001 that these conditions had been met.

On July 17, 2003, the committee announced that the recession had ended in November of 2001. The trough marked the end of the recession that began in March 2001 and the beginning of an expansion. The recession lasted eight months, which is slightly less than average for recessions since World War II. Real GDP has grown since the trough, as shown in the figure above.

The current recovery has not seen as high a growth rate of real GDP as in the average recovery. In addition, productivity has grown unusually rapidly during the recession and recovery. As a result, employment has continued to decline slightly during the recovery. In dating the trough, the committee relied on the tradition of the Bureau's business-cycle dating procedure that emphasized output as the measure of economic activity, rather than employment.

Research Meetings

The EFG Program holds three research meetings each year. Each meeting is organized by a pair of program members, who carry out a highly competitive selection process to find the six most suitable papers for the meeting. The opportunity to be considered is extended to a large group of potential participants. Almost all of the papers marking significant advances in modern macroeconomics during the past quarter century have appeared at these meetings.

Research Groups

Much of the activity of the EFG program occurs in its research groups. The groups meet during the NBER's Summer Institute in July in Cambridge and occasionally at other times and locations as well.

Economic Growth--Charles I. Jones and Peter J. Klenow, Leaders

This group conducts research on a range of subjects related to long-run economic performance. Its meetings focus on such topics as differences in income across countries, firm-level productivity growth, and technical progress over time, as illustrated by the following papers:

Based on a study of immigrants, Lutz Hendricks (1) presents new evidence on the sources of cross-country income differences. His estimates suggest that, for countries whose output per worker is below 40 percent of U.S. output per worker, less than half of that relative output gap can be attributed to human and physical capital.

Simon Djankov, Rafael La Porta, Florencio Lopez de Silanes, and Andrei Shleifer (2) present new data on the regulation of entry of start-up firms in 85 countries containing information on the number of procedures, official time, and official cost that a start-up must bear before it can operate legally. The official costs of entry are high in most countries, and could explain a portion of the sizable income differences across countries.

Daron Acemoglu, Simon Johnson, and James Robinson (3) study the interplay between growth and institutions. They show that the rise of Europe between 1500 and 1850 was driven primarily by cities along the Atlantic coast, especially by those engaged in colonialism and long-distance oceanic trade. The economic benefits from this trade strengthened the commercial class, leading to improvements in property rights and institutions that furthered Western European growth and the emergence of the modern world.

One widely held view is that competitive pressure can boost firm productivity, but the evidence to support this view is not plentiful. Jose Galdon-Sanchez and James Schmitz (4) therefore study the U.S. and Canadian iron-ore industries in the early 1980s. They find that an increase in domestic and international competition did lead to large gains in labor productivity at continuing mines producing the same products with the same technology. Tor Jakob Klette and Samuel Kortum (5) also study firm productivity but they emphasize R and D rather than competition. Their research explains why R and D as a fraction of revenues is related strongly to firm productivity yet largely unrelated to firm size or growth.

Rodolfo Manuelli and Ananth Seshadri (6) study the lag between the introduction of technology and its adoption. According to the conventional wisdom, slow technology diffusion suggests some sort of friction, for example vintage physical capital, vintage human capital, or local informational externalities. Their work, based on the diffusion of tractors in the United States between 1910 and 1960, shows otherwise.

Consumption--Orazio Attanasio, Christopher D. Carroll, and Jose Victor Rios-Rull, Leaders

This research ranges from purely empirical studies using microeconomic data to purely theoretical analyses of dynamic stochastic general equilibrium models with uninsurable idiosyncratic risk.

Nicholas Souleles and his co-authors (7) use microeconomic data to show that the timing of a household's receipt of a tax rebate check has a very strong effect on the timing of household spending, contrary to the predictions of standard consumption theory.

Jonathan Heathcote, Kjetil Storesletten, and Gianluca Violante (8) explore the macroeconomic and welfare implications of the sharp rise in U.S. wage inequality, over the last several decades. They show that if a substantial component of the increased wage variation is transitory but persistent, a standard optimizing model can reconcile the widening income distribution with a stable distribution of consumption across families.

Over the last few years several papers have examined why households in the uppermost part of the permanent income distribution save so much more than the typical household. Among the potential explanations explored have been: imperfect capital markets that require business ventures to be self-financed (9,10); the risk of medical expenses that will not be covered by insurance (11); and preferences that embody habit formation rather than the usual intertemporal separability (12).

Another persistent recent thread has been the importance of spending on durable goods. Brian Peterson (13) develops a theoretical model that generates strong cyclicality of spending on housing via an interaction between cyclical variations in uncertainty and the effect of uncertainty on spending when there are durable goods that can't be resold. Burcu Duygan (14) presents complementary microeconomic empirical work, showing that, controlling for the fall in income during the 1994 Turkish financial crisis, those consumers whose unemployment risk increased more cut their spending on durable goods by more. In previous years, Antonia Diaz and Maria Jose Luengo-Prado (15) argued that understanding the dynamics of durable goods ownership can substantially modify the interpretation of wealth inequality in microeconomic data. Also, Dirk Krueger and Jesus Fernandez-Villaverde (16) suggested that when the concentration of durable goods expenditures in the early years of...