Economic crysis (part 3)

Lets go a bit back into the history and talk about the Monte Carlo hypothesis:
Fisher (1925) argued that business cycles could not be predicted because they resembled cycles observed by gamblers in an honest casino in that the periodicity, rhythm, or pattern of the past is of no help in predicting the future. Slutsky (1937) also believed that business cycles had the form of a chance function.

The Monte Carlo (MC) hypothesis, as formulated by McCulloch (1975), is that the probability of a reversal occurring in a given month is a constant which is independent of the length of time elapsed since the last turning point. The alternative (business cycle) hypothesis is that the probability of a reversal depends on the length of time since the last turning point.
The implication of the MC hypothesis is that random shocks are sufficiently powerful to provide the dominant source of energy to an econometric model which would probably display heavy dampening in their absence. The simulations with large scale econometric models in the early 1970s showed that random shocks are normally not sufficient to overcome the heavy dampening typical in these models and to produce a realistic cycle. Instead serially correlated shocks are required.12 If shocks were in fact serially correlated the gambler (forecaster) could exploit knowledge of the error process in forming predictions and we would move away from the honest MC casino. The need to use autocorrelated shocks could alternatively indicate that the propagation model is dynamically misspecified.

McCulloch (1975) notes that if the MC hypothesis is true then the probability of a reversal in a given month is independent of the last turning point. Using as data NBER reference cycle turning points, McCulloch tests to see if the probability of termination is equal for ‘young’ and old’ expansions (contractions). Burns and Mitchell (1946) did not record specific cycle11 expansions and contractions not lasting at least fifteen months, measured from peak to peak or trough to trough. The probability of reversal is therefore less for very young expansions (contractions) than for median or old expansions (contractions), and McCulloch (1975) disregards months in which the probability of reversal has been reduced.