Business Cycles

Macroeconomic Theory I

ECON222

Fall 2017

Macroeconomic Theory I (ECON222) Business Cycles Fall 2017 1 / 16

Key features of business cycles

Fluctuation of aggregate economic activity (e.g. real GDP)

Expansions and contractions

,! Contraction ! Trough ! Expansion ! Peak

Co-movement
,! economic aggregates and prices follow regular patterns

Recurrent but not periodic

,! do not occur at regular intervals and dont last for xed length of time

Persistence
,! once an expansion or contraction begins it tends to last a while

Macroeconomic Theory I (ECON222) Business Cycles Fall 2017 2 / 16

Macroeconomic Theory I (ECON222) Business Cycles Fall 2017 3 / 16
Have business cycles become less severe?

GDP growth and the unemployment rate are less volatile after 1945

Further studies seem to conrm that cycles have been signicantly

moderated in the postwar period
,! probably not due to dierences in measurement methods
,! luck, policy, international integration?

Macroeconomic Theory I (ECON222) Business Cycles Fall 2017 4 / 16

The business cycle facts

Useful for interpreting economic data and evaluating the state of the
economy

Provide guidance and discipline for developing economic theories

,! econometricians use this data to evaluate alternative models

Helpful in guiding policy decisions

Based on seasonally-adjusted data

Macroeconomic Theory I (ECON222) Business Cycles Fall 2017 5 / 16

Business cycle terminology

Procyclical: moves in the same direction as GDP

Countercyclical: moves in the opposite direction to GDP

Acyclical: no a clear pattern over the business cycle

Leading: turning points occur before those of GDP

Coincident: turning points at the same time as those of GDP

Lagging: turning points occur later than those of GDP

Macroeconomic Theory I (ECON222) Business Cycles Fall 2017 6 / 16

Components of real expenditure

Consumption and investment are procyclical and coincident

,! spending on durable goods, xed investment and residential
investment are strongly procyclical

Inventory investment is procyclical, leading and strongly volatile

Imports are procyclical and coincident

,! exports reect foreign business cycles
,! business cycles are often transmitted between countries through the
trade balance

Macroeconomic Theory I (ECON222) Business Cycles Fall 2017 7 / 16

Macroeconomic Theory I (ECON222) Business Cycles Fall 2017 8 / 16
Macroeconomic Theory I (ECON222) Business Cycles Fall 2017 9 / 16
Macroeconomic Theory I (ECON222) Business Cycles Fall 2017 10 / 16
Labour markets

Employment is strongly procyclical and coincident

The unemployment rate is strongly countercyclical and coincident

Average labour productivity is procyclical and leading

In Canada, the average real wage is acyclical or mildly procyclical

,! studies based on individual wages nds that they are procyclical
,! conclusions about cyclicality of real wage remain elusive

Macroeconomic Theory I (ECON222) Business Cycles Fall 2017 11 / 16

Macroeconomic Theory I (ECON222) Business Cycles Fall 2017 12 / 16
Macroeconomic Theory I (ECON222) Business Cycles Fall 2017 13 / 16
Financial variables

The rate of monetary growth is procyclical and leading

,! it also leads CPI ination

Ination is procyclical, but with some lag

Stock prices are generally procyclical and leading

Nominal interest rates are procyclical and lagging

The real interest rate is acyclical

,! may be because individual business cycles have dierent sources

Macroeconomic Theory I (ECON222) Business Cycles Fall 2017 14 / 16

Macroeconomic Theory I (ECON222) Business Cycles Fall 2017 15 / 16
Business cycle analysis

Economic shocks are unpredictable forces aecting the economy

,! e.g. new inventions, weather, government policy

Short-run macroeconomic models describe how the economy

responds to various economic shocks
,! our next step is to develop such a model

Macroeconomic Theory I (ECON222) Business Cycles Fall 2017 16 / 16