The New View of Growth and Business Cycles

Abstract

Two central concerns of economic policy are growth and business cycle stabilization. There is considerable interest in devising government policies and institutions to influence prospects for economic growth and mitigate the distress associated with economic downturns. This chapter discusses the key evidence that challenges the conventional views of growth and business cycles. It describes how the price of producer durable equipment varies over the business cycle. The chapter presents evidence on trends and business cycle variation in the prices of investment goods relative to nondurables and services consumption. The prospect of a comprehensive theory of growth and business cycles is appealing because of its simplicity. Disembodied technical change has gained credence for its supposed ability to account for growth and business cycles. The implications for stabilization policy of embodied technology view are less obvious. The fact that it seems to supplant the increasing returns view means that the arguments for interventionist stabilization policy that this view supports are less compelling.

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