The economics of business cycle theory revolves around understanding the recurrent fluctuations in aggregate economic activity—expansions and contractions—that characterize market economies. These cycles, while irregular in timing and amplitude, display certain regularities in employment, production, investment, and prices. Over the past century, economists have developed two main traditions in explaining them: one empirical and inductive, epitomised by the work of Geoffrey H. Moore and Victor Zarnowitz; the other theoretical and deductive, culminating in Real Business Cycle (RBC) theory. The contrast between these approaches highlights a broader tension in macroeconomics between data-driven description and model-based explanation.
Read MoreI detect a lot of worry about the global economic outlook. This is understandable. Equities are close to, or at, record highs with extended valuations. Growth fears have crept higher on investors’ list of concerns, most notably with signs of softness in the US labour market as well as persistently weak domestic demand in Europe. Add a still-fragile Chinese economy to the mix, despite hopes of stimulus, and the prospect of a leap in economic uncertainty after next month’s US presidential elections, it is no wonder investors are on edge. But what if I told you that global leading indicators are strong and healthy and that combined with falling inflation and falling interest rates, this is one of the best macro-setups for risk assets. I suspect many would reply that such tailwinds already are comfortably priced-in to equity and credit markets. I am sympathetic to that point, but hear me out.
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