Can Conventional Theory Explain the Unconventional Recovery?

Ask the average intelligent observer of economic matters to define a business cycle and chances are good that you will receive an explanation along the following lines: Advanced economies are characterized by long-run trends in the level of gross domestic product (GDP) that can be predicted with virtual certainty. However, the actual path of output is not smooth. GDP will sometimes be above its trend level, and sometimes below. It is this “cycling” around the long-run trend that defines the periods of contraction and expansion that constitute the business cycle.