The Australian Business Cycle: A New View

In this paper I address the following questions. - Has the business cycle become longer and shallower? And why? - How stabilizing is monetary policy. In answering these questions I summarize recent research undertaken by Adrian Pagan and myself that formalizes the procedures developed by Burns and Mitchell at the NBER. Defence of our position goes beyond continuity with the past and is based on the view that the way in which these investigators defined the business cycle is a very natural one that connects with the way policy makers and commentators discuss the cycle. After discussing how to extract cyclical information my attention then turns to describing the features of the Australian business cycle. Here I employ recently constructed data on annual GDP that goes back to 1861. The recurrent pattern of peaks and troughs in this annual data marks out recessions that are somewhat more severe than that seen in quarterly data. I find little evidence that these major contractions are shorter in the second half of the 20th century than they were in the second half of the 19th century. Major expansions in the late 20th century were, however, longer than for any previous period. I find that the volatility of annual GDP growth rose markedly in the first half of the 20th century but declined to an all time low in the second half of that century. However, the decline in volatility between the late 19th and late 20th centuries is not very marked. After examining the quarterly data available from 1959.3 to 2001.4 I find little evidence that contractions are shorter but there is some very weak evidence that the amplitude of these contractions has moderated. The apparent decline in volatility of Australian GDP is shown to be explained by two statistical factors viz there is some residual seasonality in GDP which seems to be more pronounced in the 1960 and 70s and the ABS has reduced the extent of measurement error in GDP. After accounting for these no long run trend is discernable in volatility.