Vernon Smith discovers the business cycle

The current recession has certainly increased the academic interest in business cycles, their origin and their cures, if any. Many prominent economists ventured outside their traditional field of research to weigh in, most prominently Paul Krugman, a trade theorist. Add now Vernon Smith, an experimentalist and also a Nobel Prize winner, to the mix.

Steven Gjerstad and Vernon Smith do an exercise that is very reminiscent of Burns and Mitchell: a graphical analysis of various recessions to determine their dynamics. They conclude that various types of investment fluctuate the most, that residential investment leads the cycle, while business investment lags it. In other words, they have discovered some of the stylized facts that have been driving business cycle research of the last decades. This is their third paper on the topic, I am sure there will be more.