Sherlock Holmes of the year

22 June, 2015 at 20:24 | Posted in Economics | Leave a comment

Do economic booms cause economic busts?

To a lot of people, this seems like a silly question to even ask. Of course booms cause busts, they say. Excessive greed or optimism or easy credit leads to overinvestment, soaring asset prices and unsustainable borrowing binges. What goes up must come down, and the surest sign of a bust tomorrow is a boom today …

Many people instinctively believe this that it would astonish most people to learn that for the last half-century, this hasn’t been the way macroeconomists — the type working as university professors, anyway — think about the business cycle …

A small handful of macroeconomists are turning back to the old idea that booms cause busts, and vice versa … Paul Beaudry and Franck Portier are two such researchers. They are famous for a 2006 theory saying that news about future changes in productivity could be what cause recessions and booms. That model never really caught on …

Now, Beaudry and Portier, along with co-author Dana Galizia, are going after bigger fish. They want to resurrect the idea that booms cause recessions.

Noah Smith

Wooh! Booms causing busts. Who would have thought anything like that.

Impressive indeed …

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