Expected Future Changes in the Macroeconomy

Expected Future Changes in the Macroeconomy:

We suppose that the future will bring a continued increase in liquidity. People will discover it easier and easier to borrow therefore their spending will be less closely tied to their current income and the marginal propensity to consume will fall. We expect international trade as well as financial markets to become increasingly integrated however at least as far as financial markets are concerned it isn’t clear that this is a good thing. We expect that over time the power as well as effectiveness of monetary policy will decline as increased financial options erode the key role played by commercial bank deposits in finance. And we expect that firms will become better at managing their inventories consequently that inventory fluctuation-driven business cycles will become a thing of the past.

The History of Macroeconomic Fluctuations:

We are able to reach a few solid conclusions about the changing cyclical variability of the American economy. The first as well as most obvious fact is the extraordinarily large size of the business cycle during the interwar period the 1920-1940 periods that came after World War I and before World War II. The Great Depression that starts in 1929 was only the largest of three interwar business cycles. Other main contractions in economic activity took place in 1920-22 and 1937-38.

A subsequent clear conclusion is that in the post-World War II era the business cycle, measured comparative to the size of the economy, has been a little bit however not much smaller than back before World War I. The shrinkage in the business cycle emerges to be between 25 and 30 percent. The postwar business cycle is a to some extent smaller animal however it is surely of the same species.

Therefore many of the changes in the economy since 1900 must have roughly cancelled each other out. The refusal of agriculture as a share of employment and production (as a rule not very susceptible to the industrial business cycle) has been offset by the rise in importance of relatively cyclical services (as well not very susceptible to the business cycle). A raise in the lifespan of capital equipment due to more durable materials might be thought likely to raise cyclical volatility because more of economic activity takes the form of long-term bets on the future. However this has apparently been offset by faster technological obsolescence which decreases the effective economic life of investments in fixed capital. A smaller multiplier because of reduced liquidity constraints on households has presumably had some effect. However perhaps keeping spending proportional to income remains a useful rule of thumb even as credit becomes widely available as well as so perhaps credit availability hasn’t done as much to reduce the multiplier as economists' theories claim.

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