Business cycles and economic policy, 1945-2007

We explain how governments contributed and responded to fluctuations in economic activity in Europe during the second half of the twentieth century. In the second section we sketch the basic ideas essential to understanding the relationship between economic policy and business cycles. They include the notion that monetary and fiscal policies influence fluctuations in output, employment, and inflation according to the financial openness of the economy (free capital flows versus capital controls), as well as the currency regime chosen by policy makers (pegged versus flexible exchange rates). We also document the timing of financial liberalization in Europe and the persistent preference of most European governments for pegged exchange rate regimes over the entire period. We then examine the evolution of basic features of cycles in Europe, such as volatility and synchronization. We note the falling volatility of cycles in the 1960s and from the mid-1980s until 2007, explaining why changes in economic policy making were a fundamental driver. In the next section we support this analysis with narratives of the responses of national governments and central bankers to cyclical fluctuations before and after the global recession of 1974-5. Finally we look briefly at the historical and recent experience of eastern Europe, assessing the area's reintegration from 1989 after the long economic decoupling from the rest ofthe continent in 194