The life cycle of economic expansion explained

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We read with great interest Rana Foroohar’s column (“A long economic recovery is not necessarily better”, June 23). Ms. Foroohar observes that the current economic expansion in the United States is just days away from becoming the longest in recorded history. She also notes that the trend towards longer duration of economic expansions in recent decades has facilitated the rise in private and public debt levels observed over the same period.

We feel compelled to refer to our recent research on this topic, where we document profound changes in the shape of the business cycle not only in the United States, but also in the other G7 economies, over the past three decades.

According to our study, the direction of causality is more likely to go in the other direction: higher household and corporate indebtedness translate into longer and more regular economic expansions, interrupted by short but more violent recessions. . Access to more credit opens up better possibilities for smoothing consumption and investment choices. On the other hand, higher indebtedness disproportionately affects macroeconomic outcomes during recession episodes.

Finding the right direction of causality is essential for the appropriate design of economic policies. Policymakers must carefully consider the size, duration and nature of economic booms before tailoring the appropriate policy response, while necessarily preparing for the next downturn.

Henrik Jensen

University of Copenhagen and Center for Economic Policy Research

Ivan Petrella

Warwick Business School and Center for Economic Policy Research

Soren Hove Ravn

University of Copenhagen

Emiliano Santoro

University of Copenhagen

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