56 Economic Perspectives The business cycle: Its still a puzzle Lawrence J. Christiano and Terry J. Fitzgerald Lawrence J. Christiano is a professor of economics at Northwestern University, a consultant to the Federal Reserve Bank of Chicago, and a research associate at the National Bureau of Economic Research. Terry J. Fitzgerald is an economist at the Federal Reserve Bank of Cleveland. The title of this article is modified from Kocherlakotas (1996) article. The findings for business cycle analysis are similar to Kocherlakotas for the equity premium puzzle. The authors are grateful for discussions with Michelle Alexopoulos, Stefania Albanesi, Paul Gomme, Henry Siu, and Robert Vigfusson. Introduction and summar y Good fiscal and monetary policy requires a clear un- derstanding of the workings of the economy, espe- cially what drives the business cyclethe periodic ups and downs in economic activity. Since at least the late 1800s, a full swing from the start of an eco- nomic expansion to a recession and back to the start of another expansion has generally taken between two and eight years. Every citizen is keenly aware of the state of the economy, whether it is in prosperity or recession. Everyone is so conscious of the business cycle because most sectors of the economy move up and down together. 1 This phenomenon, referred to as comovement, is a central part of the official definition of the business cycle. The definition is set by the Na- tional Bureau of Economic Research (NBER), which decides when recessions begin and end. Under the NBERs definition, ... a recession is a [persistent] period of decline in total output, income, employment, and trade, usu- ally lasting from six months to a year, and marked by widespread contractions in many sectors of the economy. 2 Even though comovement is a defining character- istic of the business cycle, in recent decades macro- economists have tended to focus on understanding the persistence in the ups and downs of aggregate economic activity. They have generally been less con- cerned with understanding the synchronized nature of this pattern across sectors. In part, the omission reflects the conceptual difficulties inherent in think- ing about an economy with many sectors. 3 Standard models of business cycles assume there is only one good being produced and so they consider only one economic sector. These models do not encourage thinking about the comovement of economic activity across many sectors. Since these models were first introduced, in the late 1970s and early 1980s, the state of macroeconomics has advanced rapidly. The con- ceptual and computational barriers to thinking about multiple sectors are quickly falling away. As a result, recent years have witnessed a renewed interest in understanding comovement. We have two objectives in this article. The first is to document business cycle comovement. We examine data on hours worked in a cross section of economic sectors. We examine the business cycle components of these data and show that the degree of comovement is substantial. Our second objective is to analyze explanations for this comovement. We find that none is completely satisfactory. Still, this is a growing area of research, and we are seeing some progress. Identifying comovement To study comovement across sectors over the business cycle, we need the following two things: a measure of the level of economic activity in the vari- ous sectors of the economy; and a precise definition of what we mean by the business cycle component of the data. Below, we address these two issues. After that, we present our results, characterizing the degree of comovement in the data.