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D ATING B USINESS C YCLES PANEL D ISCUSSION : D ATING B USINESS C YCLES James Bullard* President and CEO Federal Reserve Bank of St. Louis 10th EABCN Workshop on Uncertainty over the Business Cycle European Central Bank, Frankfurt March 31, 2009 Any opinions expressed here are mine and do not necessarily reflect those of other Federal Open Market Committeee members. D ATING B USINESS C YCLES NBER D ATING P ROCESS Mitchell’s dissertation, 1913.1 Burns and Mitchell, 1946.2 Process developed and put in place without being informed by modern macroeconomic theory. Theory offers guidance about more natural summary measures of economic performance. Binary nature is bothersome and may be harmful if it acts as an informational signal. 1. Mitchell, Wesley C., Business Cycles, 1913. 2. Burns, Arthur F., and Wesley C. Mitchell, Measuring Business Cycles, National Bureau of Economic Research, New York, NY 1946. D ATING B USINESS C YCLES S TATISTICAL M ODELS : A UTOMATION Why do this via judgement call by the Dating Committee? Statistical models exist and do a better job. Everyone can replicate the recession call. This would be an important improvement. D ATING B USINESS C YCLES B INARY N ATURE Throws away information—why? Simple summary of the state of the economy should be continuous. Two-state nature influences research questions and analysis. “Recession” is an artificial construction putting “special emphasis” on certain time periods. D ATING B USINESS C YCLES B INARY S IGNALS AS H ARMFUL S UMMARY S TATISTICS We know expectations are critical to how the macroeconomy operates. Recession call is a signal—it can act as a coordinating device. We want firms to assess their own markets and prospects for earnings. Sending a signal can send firms into “recession state.” Creates amplified and spurious cyclical patterns in economy. D ATING B USINESS C YCLES E XAMPLE : L EARNING AND THE G REAT M ODERATION * Regime-switching shocks; two-state Markov. Households and firms must infer state via Bayesian inference. Confusion about states moderates behavior. Clarity about states exacerbates behavior: “Sounding the siren.” * Bullard, James and Aarti Singh, "Learning and the Great Moderation," Federal Reserve Bank of St. Louis Working Paper 2007-027B, June 2007, Revised March 2009. D ATING B USINESS C YCLES U NDEFINED L EVEL OF A CTIVITY M ITCHELL FROM B URNS AND The Burns and Mitchell idea of leaving the level of activity undefined is mystifying. Theory gives us guidance about what we would like to summarize. Theory says: utility. This would suggest an index of consumption and leisure. Most approaches to summarizing the economy have steadfastly avoided leisure measures. But: consider comparisons of the U.S. and European workplace. WWII was not a utility-raising event. D ATING B USINESS C YCLES Z ERO AS A B ENCHMARK N UMBER Declines in the level of activity as defining events. This makes little sense from a growth theory perspective. We expect economies to grow on average. Growth averages differ across economies. Implies “recession” experiences differ across economies because of arbitrary definition. More sensible “two standard deviations below normal.” D ATING B USINESS C YCLES H ODRICK –P RESCOTT F ILTERING M ETHODS AND R ELATED More consistent with established growth theory. Trends can be tracked. Below par – above par performance half the time. Avoids the alarm bell problem. Controls for differing growth rates across economies. D ATING B USINESS C YCLES P ROSPECTS FOR R EFORM Recession dating has become part of the American psyche. It has been handed to us from a pre-modern theory era. Arguably harmful. Easy ways to improve: Statistical methods could automate the process. Tie closer to standard theory for ideas about what to measure.
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