FEDERAL RESERVE BANK OF DALLAS 21 ECONOMIC REVIEW FOURTH QUARTER 1997

Societies would prefer a steady growth path for their national income of, say, 3 percent every year to one that delivers a 3 percent growth rate on average, but with zigzags from, say, 12 percent one year to –6 percent the next. Consequently, they typically demand that policymakers eliminate undesired economic fluctuations.1 It is not surprising, then, that the understanding of business cycles has always captured the interest of economists and has inspired some of their best work. The work of John Maynard Keynes and Milton Friedman went a long way in defining the terms and identifying the issues that a suc-cessful theory of economic fluctuations ought t