Monetary and Economic Studies vol.37 / November 2019

Interaction between Business Cycles and Economic Growth

Sohei Kaihatsu, Maiko Koga,Tomoya Sakata, Naoko Hara

In the aftermath of the recent global financial crisis, advanced economies have faced sluggish recoveries or long-lasting economic slowdowns. This experience has challenged the conventional dichotomy of business cycles and economic growth, which has long been central to macroeconomic analysis. Against this backdrop, we review the literature regarding the relationship between business cycles and economic growth. This study consists of three parts. First, we provide basic ideas about the relationship between business cycles and economic growth, and a simple empirical analysis on economic growth rates in advanced economies. Second, we survey studies exploring the effects of business cycles on economic growth. Specifically, we focus on hysteresis effects caused by labor market structure, firm activity, and fiscal policy. Third, we review the literature on the effects of economic growth on business cycles, through mechanisms such as technological progress and population aging.

Keywords: Business cycles; Economic growth; Hysteresis

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

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