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Postwar Fluctuations: Ecture

This lecture discusses postwar fluctuations in the US economy including recessions, unemployment, and macroeconomic volatility. It notes that GDP and unemployment vary significantly, with recessions defined as a decline in economic activity that spreads across sectors. The lecture also discusses Okun's law relating GDP growth and unemployment changes. It analyzes how macroeconomic volatility stabilized in the mid-1980s and the history of inflation and monetary policy over this period. Issues around inflation rising in the 1960s-70s and then falling in the early 1980s are also raised.

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27 views19 pages

Postwar Fluctuations: Ecture

This lecture discusses postwar fluctuations in the US economy including recessions, unemployment, and macroeconomic volatility. It notes that GDP and unemployment vary significantly, with recessions defined as a decline in economic activity that spreads across sectors. The lecture also discusses Okun's law relating GDP growth and unemployment changes. It analyzes how macroeconomic volatility stabilized in the mid-1980s and the history of inflation and monetary policy over this period. Issues around inflation rising in the 1960s-70s and then falling in the early 1980s are also raised.

Uploaded by

Happy Adela
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© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Economics 134 Spring 2011

Christina Romer David Romer

LECTURE 2 Postwar Fluctuations


January 20, 2011

Announcements
Some copies of the reader have an outdated version of the syllabus at the front. The correct version was distributed last time and is posted on the course website. Do the readings before class. Please turn off all electronic devices.

I. POSTWAR FLUCTUATIONS IN ECONOMIC ACTIVITY

GDP does not grow smoothly.

Unemployment varies significantly, and sometimes rises sharply.

A recession [is] a significant decline in economic activity [that] spreads across the economy and can last from a few months to more than a year (emphasis added).

Postwar recessions vary in frequency, duration, and size.

Okuns Law
A shortfall of GDP growth from normal of 2 percentage points is usually associated with a rise in the unemployment rate of about 1 percentage point.

In recessions, the work week and output per hour usually fall. (And labor force participation usually falls as well.)

Short-run fluctuations in output are distributed very unevenly over the components of output.

II. CHANGES IN MACROECONOMIC VOLATILITY

Traditional data series showed a dramatic stabilization of the economy.

Macroeconomic volatility in the early postwar decades was very similar to before the Depression (or before WWI).

Macroeconomic volatility fell dramatically around the mid-1980s.

Real GDP Growth (Percent)


10 15 20 -5 -15 0 5
1947-II 1949-III 1951-IV 1954-I 1956-II 1958-III 1960-IV 1963-I 1965-II 1967-III 1969-IV 1972-I 1974-II 1976-III 1978-IV 1981-I 1983-II 1985-III 1987-IV 1990-I 1992-II 1994-III 1996-IV 1999-I 2001-II 2003-III 2005-IV

-10

Real GDP Growth 1947:2-2007:4

The fall in volatility in the mid-1980s shows up clearly in real GDP growth.

III. INFLATION AND MONETARY POLICY OVER THE POSTWAR PERIOD

Inflation rose irregularly over the 1960s and 1970s, fell dramatically in the early 1980s, and has remained low.

Issues Raised by Postwar Inflation Behavior


Why was monetary policy conducted in a way that led to a rising inflation? What changed around 1980? What is the link (if any) between the rising inflation and the failure of the real economy to become more stable? What is the link (if any) between the conquest of inflation and the Great Moderation?

Percent
10 12 14 16 18 20 0 2 4 6 8

Federal Funds Rate 1954:7-2007:12

The history of postwar monetary policy is complicated.


1954-07 1956-06 1958-05 1960-04 1962-03 1964-02 1966-01 1967-12 1969-11 1971-10 1973-09 1975-08 1977-07 1979-06 1981-05 1983-04 1985-03 1987-02 1989-01 1990-12 1992-11 1994-10 1996-09 1998-08 2000-07 2002-06 2004-05 2006-04

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