Seven Questions about Recessions

• Author: Marco E. Terrones
• Pages: 6-8

Page 6

Question 1: What happens during recessions?

According to the National Bureau of Economic Research, which maintains a chronology of U.S. business cycles, recessions correspond to a significant decline in economic activity, lasting more than a few months, normally visible in production, employment, real income, and other indicators.

Excluding ongoing recessions, there have been 122 recessions in the advanced countries since 1960 (Claessens, Kose, Terrones, 2008). These recessions are infrequent and short-lived events-on average, they lasted a year. Moreover, in a typical recession, real GDP falls from peak to trough by about 2 percent, but this number varies quite a bit across episodes. Some recessions are severe, reaching in some cases the status of depression-i.e., events with a real GDP decline exceeding 10 percent. Refl ecting in part the great moderation of business cycles, recessions in the advanced economies have become less frequent and milder since the mid-1980s, although the current recession is likely to interrupt this trend (IMF, 2009).

As one would expect, the main components of aggregate demand typically decline following a similar pattern to that of output during recessions, albeit with important timing differences. While private consumption stagnates or falls slightly during a recession, private investment drops sharply and its recovery usually lags that of output. Recessions are also accompanied by a decline in international trade.

Despite a drop in exports, the current account balance in the advanced economies typically improves during a recession mainly because imports experience a much larger decline than exports do. Asset prices and credit also fall in response to a weakening in economic activity. The timingof their recovery differs, however, across asset prices-with equity prices typically preceding and house prices lagging the rebound in output. The unemployment rate typically rises before the onset of a recession but stays compressed more than a year after the recession ends.

Question 2: Are globally synchronized recessions different?

Globally synchronized recessions, defined as those events during which half of the advanced countries are in a recession at the same time, are relatively rare. During the 1960-2007 period there were 37 such recessions bunched in three years (1975, 1980, and 1992) that coincided with global shocks.

Globally synchronized recessions last longer and cost more than nonsynchronous ones-they last a quarter longer and result in more than two times larger cumulative output losses.

Globally synchronized recessions are associated with more severe contractions in industrial production along with greater job losses. Typical declines in house prices...