Advanced, money-using economies occasionally encounter temporary
periods of underproduction, where resources are not sufficiently
utilized and some workers are rendered unemployed. Since 1980, the
United States has experienced five recessions, ranging from 6 to 18
months in duration. The average recession over the period lasted just
under a year.
Periods of underproduction are costly in two ways. First, they mean
we get fewer goods and services than we would like, given our
constraints. Second, since workers gain and maintain skills while
working, their temporary unemployment makes them less productive in the
future. In other words, we produce less than we are capable of today and
we are less capable of producing than we would have been capable of in
the future. For these reasons, and perhaps others, we would like to
prevent periods of underproduction when possible.
Monetary policy has the potential to reduce the depth and duration of
recessions, when they are driven by nominal disturbances. But it takes
time to formulate and implement an appropriate monetary policy response.
And the monetary authority cannot even begin this task until it
realizes there is a problem. Alas, the lags in data collection make it
very unlikely that the monetary authority will be able to remedy all but
the most long-lasting recessions.
Consider a relatively straightforward question: are we in a
recession? I am not asking, “What caused the recession?” or “How severe
is the recession?” or “How long will the recession last?” — all of which
would be useful to know when formulating an appropriate monetary policy
response. No, I am merely asking whether we are currently experiencing a
recession. As it turns out, we struggle to answer even this relatively
straightforward question in a timely manner.
In the United States, the National Bureau of Economic Research’s Business Cycle Dating Committee
is widely viewed by economists as the authority for determining when
the economy is in a recession. A list of expansions and contractions,
beginning in December 1854, is maintained here.
The site also includes the announcement dates for peaks (when a
recession begins) and troughs (when a recession ends) since 1980. In the
following table, I reproduce the data since 1980 and include
calculations for the (1) duration of each recession and (2) the number
of months between the start of the recession, as identified by the
committee, and the announcement of that recession by the committee.
The typical announcement lag — that is, the time between the start of
a recession and when the Business Cycle Dating Committee announces the
start of a recession — is just under 8 months. That’s a huge lag. The
typical recession lasts a mere 3.3 months after the announcement. And,
for the recessions beginning in 1990 and 2001, the contraction had ended
before the announcement of the contraction’s start had been made!
One cannot expect the monetary authority to formulate and implement
an appropriate monetary policy response if it does not know the economy
is in recession until that recession is over. But, even when it knows,
it often has very little time to do much about it.
There are two caveats in order here. First, the Business Cycle Dating
Committee does not intend to announce recessions in a timely manner in
order to facilitate the successful conduct of monetary policy. Rather,
it intends to provide the most accurate assessment of when a recession
begins and ends for historical classification. That almost certainly
means it is more conservative in announcing recession dates — waiting
until it is absolutely sure — than it would be if it were trying to
facilitate monetary policy. The Federal Reserve relies on a host of
indicators and constructs elaborate forecasts to make its own assessment
of the state of the economy. It does not wait around for the NBER to
certify that a recession has begun.
Second, it might be argued that the successful conduct of monetary policy explains whythe
typical recession has been so short since the 1980s. Perhaps recessions
would have been longer and deeper if the Fed were not engaged in
Despite these two caveats, however, the point remains: it takes time to collect and analyze data. While it might not take as long to collect sufficient evidence for policy as it does to provide an authoritative statement for the historical record, the known time for the latter gives us a good reason to be concerned about the unknown time for the former. After all, any policy conducted on the evidence available prior to when the Business Cycle Dating Committee feels confident enough to state that a recession has begun is necessarily conducted on a less certain assessment of the state of the economy.
Likewise, the recognition that monetary policy may have reduced the
duration of recessions in no way invalidates the claim that there
remains a considerable amount of underproduction that the monetary
authority is unable to do much about. If monetary policy is conducted
based on historical data, occasional periods of underproduction, while
perhaps short in duration, are inevitable.
It is difficult to conduct monetary policy effectively. It takes time to formulate and implement an appropriate monetary policy response. That task is made all the more difficult by the lags of data collection. Recognizing the existence of these lags does not imply that the Fed is incapable of reducing the depth and duration of recessions. However, it should instill a sense of humility in those of us considering what the Fed might accomplish in practice.
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