A Review Of Business Cycle Theory And Forecast Of The Current Business Cycle

Abstract

As the business cycle fluctuates, the U.S. economy may face increased unemployment in the case of an economic downturn or increased inflation in the stage of an expansion. Therefore, the study of business cycles is important in determining the current and future condition of the economy as a whole. This study seeks to expand the current body of knowledge of the business cycle by combining the history of economic theory of “Veblen”, “Marx”, “Schumpterer”, “Friedman”, “Keynes”, “Minsky”, and “Sherman” with the diffusion index popularized by “Valentine and Dauten” (1983). The purpose of this study are two-folds: first is to review the theoretical framework of the history of economic thoughts of business cycle and the methodology of diffusion index; second is to use these economic theories and the technique of diffusion index to forecast the strength and direction of the business cycle of the US economy. The results of this study indicate that it is possible to derive an accurate forecast of the strength and direction of the business cycle by combining economic theories and the technique of diffusion index.