Facts and Challenges from the Great Recession for Forecasting.pdf

Journal of Economic Literature 2013, 51 (4), 1120–1154 /10.1257/jel.51.4.1120 Facts and Challenges from the Great Recession for Forecasting and Macroeconomic Modeling† Serena Ng and Jonathan H. Wright* This paper provides a survey of business cycle facts, updated to take account of recent data. Emphasis is given to the Great Recession, which was unlike most other postwar recessions in the United States in being driven by deleveraging and financial market factors. We document how recessions with financial market origins are different from those driven by supply or monetary policy shocks. This helps explain why economic models and predictors that work well at some times do poorly at other times. We discuss challenges for forecasters and empirical researchers in light of the updated business cycle facts. 1. Introduction that business cycles were all alike in the sense of having many common features. When In 1985, Victor Zarnowitz wrote a paper in Zarnowitz wrote his paper, the economy had the Journal of Economic Literature that just emerged from the longest post–World provides historical background on business War II contraction, preceded by a string of cycles and outlines the evolution of thought supply shocks with severe inflationary con- leading to developments in theory and sequences that made economists and econo- related empirical evidence (Zarnowitz 1985). metricians reconsider the adequacy of their Prior to that writing, the dominant view had assumptions and tools used to analyze busi- been that the business cycle reflected sta- ness