Do longer expansions lead to more severe recessions? No, say Cleveland Fed researchers
They find deeper recessions are often followed by stronger recoveries, while longer and stronger expansions are not followed by deeper recessions
The Great Recession was the most severe contraction of the postwar period. The expansion that followed, which we are currently in, has been uncommonly long and strong. This has rekindled interest in the question of whether features of recessions and expansions such as duration and intensity are correlated. Federal Reserve Bank of Cleveland researchers Murat Tasci and Nicholas Zevanove assess the evidence for two alternative hypotheses that economists have developed related to this question, each of which makes different predictions. The plucking theory predicts deep downturns will be followed by strong expansions, while the forest fire theory predicts long expansions will be followed by severe recessions. Using both aggregate and state-level data, the researchers find clear evidence for the plucking theory and little for the forest fire theory.
“Our analysis of historical business cycle data at the national and state level suggests that the strength of the current economic expansion is tied to the severity of the Great Recession, consistent with the plucking view of the business cycle,” say Tasci and Zevanove. “We find that contraction severity is correlated with the strength of the subsequent expansion, as predicted by the plucking view, but expansion duration is not correlated, positively, with the subsequent contraction’s severity.” The researchers find there is some correlation between expansion duration and contraction severity but it appears to be negative, a contradiction of the forest fire theory.
While the evidence using state-level data seems strong, Tasci and Zevanove say one must use caution in interpreting the results, as the nature of business cycles at the state level might be different from that at the national level. “Moreover,” say the researchers, “our empirical analysis does not address the underlying economic mechanisms that are responsible for pushing the economy in one direction or another. It is also important to keep in mind that economists have considerable difficulty forecasting recessions, let alone their severity.”
Federal Reserve Bank of Cleveland
The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.
The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.
Doug Campbell, firstname.lastname@example.org, 513.455.4479