1. Chapter 8 Business Cycles
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2. What are Business Cycles?
Business Cycles refer to fluctuations in aggregate economic activity (real GDP is the “reference” variable).
Cycles have periods of expansion and contraction (with identifiable peaks and troughs).
Expansions and contractions occur across multiple sectors/industries at the same time.
Co-movements refer to predictable relationships across variables in over a business cycle.
Cycles are recurrent, but not periodic (they are not regular and predictable).
Cycles are persistent. Once a contraction begins, it normally continues for a while; the same is true of expansions.
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3. Figure 8.1 A business cycle
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4. Business Cycle Facts
Business cycles are characterized by similarities in the way that different variables move in relation to each other (co-movements), especially in relation to the reference variable, real GDP.
The description of regular co-movements constitutes what we call business cycle facts.
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5. Characterizing Co-movements
Coincident, leading and lagging variables
Procyclical, countercyclical, acyclical variables
The amplitude of fluctuations is also useful in characterizing business cycle facts.
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7. Durables and investment goods have high amplitude fluctuations.
More Facts
Various components of output (consumption of durables and non-durables, industrial production, investment) are all procyclical.
Durables and investment goods have high amplitude fluctuations.
Services and consumer non-durables have low amplitude fluctuations.
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8. Government spending is procyclical, largely because of wartime booms
More Facts
Inventory investment is volatile, but is generally leading and procyclical.
Government spending is procyclical, largely because of wartime booms
Employment is procyclical and coincident.
Unemployment is countercyclical and, at least recently, has been lagging.
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9. Labor productivity is procyclical and leading.
More Facts
Labor productivity is procyclical and leading.
Real wages are mildly procyclical.
Money growth is leading and procyclical.
Inflation is procyclical, but with a lag.
Stock prices are procyclical and leading (but poor predictors of recessions).
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10. Nominal interest rates are procyclical and lagging (like inflation).
More Facts
Nominal interest rates are procyclical and lagging (like inflation).
Real interest rates have no clear cyclical pattern.
Some shocks causing business cycles may cause rates to rise; others may cause them to fall
Business cycles are often coincident across countries.
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