Fluctuations in Confidence and Asymmetric Business Cycles

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Staff Reports

Fluctuations in Confidence and Asymmetric Business Cycles

February 1999 Number 66

JEL classification: C22, E32

Author: Simon M. Potter

There is now a great deal of empirical evidence that business cycle fluctuations contain asymmetries. The asymmetries found in post-war U.S. data are inconsistent with the behavior of the U.S. economy in the Great Depression. In a model where business cycle asymmetries are produced by rational fluctuations in the confidence of investors, I examine whether this inconsistency can be explained by differences in government policy. It is found that the "ineptness"of government intervention during the Great Depression in reducing the confidence of investors rather than the success of post-war stabilization policy in raising confidence is the most likely explanation.

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