Harbingers of Recessions - Finance & Development, March 2014

Harbingers of Recessions - Finance & Development, March 2014: "There are two views about the relationship between changes in asset prices and business cycles, particularly recessions. One view contends that asset price corrections often precede or coincide with a recession. The 1929 stock market crash and the Great Depression, the early 1990s asset price collapse and the ensuing recession in Japan, and the 2008 global crash in asset prices and the Great Recession are some of the most vivid cases of recessions foreshadowed by asset price corrections.­
The other view argues that asset prices may fluctuate too widely to be useful predictors of recessions. The sharp collapse in the stock market in 1962 did little to unsettle the economic recovery in the United States. Likewise, the stock market crash of October 1987 did not significantly affect U.S. economic activity, despite predictions of a severe recession in 1988. Proponents of this view contend that asset price changes often reflect overly optimistic or pessimistic changes in investors’ expectations and are therefore poor indicators of the business cycle.­"



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