Abstract
Economic fluctuations refer to ups and downs in the levels and/or rates of changes in the
economic goal variables like real national income (GOP), inflation rate, and the rate of
unemployment. Stabilization policies are the tools in the hands of the policy-makers to
counter economic fluctuations and these include fiscal policy, monetary policy, and
foreign exchange rate policy. This paper analyses the extent and depth of all major
fluctuations (business cycles) across the G-7 countries, India, China, Malaysia, and the
world as a whole during the Great Oepression and the last 40 years, identifies the major
cause behind each significant departure from the trend, and examines the theoretical
limitations as well as the actual application of the various policies to tame those
business cycles. This paper finds that: Business cycles are universal. Each of the countries under analysis here has
experienced an overall positive growth rate but also a negative growth rate,
generally in more than one year, during the period of this study. Further, the
standard deviation of the growth rate as a percentage of the growth rate (called the
coefficient of variation) is sizeable in all countries as it varies between a low of
41 per cent in Malaysia and a high of 96 per cent in the UK. Business cycles are not always synchronized across countries. During the Great
Depression and stagflation periods, most countries suffered from similar maladies
but such a synchronization was rarely found in other times. For example, Japan
performed relatively better during the 1950s and 1960s, and China and the South-East
Asian economies enjoyed that position during the 1980s and 1990s. Further, while
every country has experienced a negative growth rate, there is no year in the last
50 years in which the growth rate was negative in all countries. The world as a
whole, of course, has always enjoyed a positive growth rate. Business cycles have become milder over time. During the Great Depression, output
fell by over two digit rates in many countries japan experienced a two-digit growth
rate in most of the years during 1960s, 1980s, and 1990s, but lately, the growth
rate in most countries is hovering around 2 to 5 per cent. Business cycles are caused by varying events. While the adverse demand shock caused
the Great Depression, the adverse supply shock triggered the stagflation and
economic reforms have been responsible for hyperinflation, financial crises, and
prosperity. always been applied in the right perspective. During the Great Depression, the
nominal money supply should have increased but it fell and the government
expenditure rose but only marginally. The simple correlation and multiple regression
analysis' results for the three select countries suggest that while the monetary
policy was conducted as an anti-cyclical tool in lndia, it was pro-cyclical in the
US and China, and quite the opposite was the case with regard to the conduct of
fiscal policy.
The cycles are bad and it is unfortunate that the stabilization policies do not offer panacea to tame them fully. However, it is heartening to find that economic fluctuations have become milder over time and the credit for this goes to the innovative developments in the macroeconomic theory and to the improvements in the practice of stabilization policies. Though cycles are unlikely to be eradicated, there is now only little fear of severe crises in future like the Great Depression or stagflation.