Lecture Notes 8.pdf - Chapter 8 Business Cycles Tingjun Liu...

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Chapter 8: Business Cycles Tingjun Liu FBE of HKU February 27, 2018 T Liu (FBE of HKU) MFIN7007 February 27, 2018 1 / 62
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Chapter Outline ° What is a business cycle? ° The American business cycle: The historical record. ° Describe the behavior of various variables over business cycles. ° Use aggregate demand and aggregate supply to describe the impact on business cycles of various shocks. T Liu (FBE of HKU) MFIN7007 February 27, 2018 2 / 62
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What Is a Business Cycle? ° U.S. research on cycles began in 1920 at the National Bureau of Economic Research (NBER): ° NBER maintains the business cycle chronology—a detailed history of business cycles: http://www.nber.org/cycles.html ° NBER sponsors business cycle studies. ° Burns and Mitchell (Measuring Business Cycles, 1946) makes five main points about BCs: ° Pt1: BCs are fluctuations of aggregate economic activity, not a specific variable. ° No simple formula. In practice, a small group of economists who form the NBER’s Business Cycle Dating Committee make the determination. T Liu (FBE of HKU) MFIN7007 February 27, 2018 3 / 62
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Pt2: expansions and contractions ° The period of time during which aggregate economic activity is falling is a contraction or recession (Fig 8.1). ° A particularly severe recession is called a depression. ° After reaching the low point of the contraction, the trough (T), aggregate economic activity begins to increase until reaching the high point, the peak (P) ° The period of time during which aggregate economic activity grows is an expansion or a boom. ° The sequence from one peak to the next, or from one trough to the next, is a BC. ° Peaks and troughs are turning points. ° Turning points are officially designated by the NBER BC Dating Committee. ° meets only when its members believe that a turning point may have occurred. Examine a variety of economic data to determine the month. Usually well after a peak or trough occurs. T Liu (FBE of HKU) MFIN7007 February 27, 2018 4 / 62
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Fig 8.1 T Liu (FBE of HKU) MFIN7007 February 27, 2018 5 / 62
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Pts 3,4,5 ° Comovement. Expansions or contractions occur at about the same time in many economic activities. ° Recurrent, but not periodic: ° “Recurrent” means the pattern of contraction–trough–expansion–peak occurs again and again. ° Not being periodic means that it doesn’t occur at regular, predictable intervals. ° Persistent: ° Declines are followed by further declines; growth is followed by more growth. ° Because of persistence, forecasting turning points is quite important. T Liu (FBE of HKU) MFIN7007 February 27, 2018 6 / 62
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Table 8.1 (33 BCs since 1854) T Liu (FBE of HKU) MFIN7007 February 27, 2018 7 / 62
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The American BC: The Historical Record. Pre–World War I period ° Recessions were common from 1865 to 1917. ° 338 months of contraction and 382 months of expansion (1854-1914) ° compared with 642 months of expansion and 104 months of contraction from 1945 to 2007.
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