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Lec_6_Rules_of_Thumb

Lec_6_Rules_of_Thumb - EC 400 Rules of Thumb for...

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EC 400 1 Rules of Thumb for Identifying a Recession How do I pick a set of indicators to examine? V i bl i l f th b •Variables in rules of thumb •Variables that theory implies will lead recessions (or lead business cycle peaks) What is a recession? Not just a decline in output. If GDP declines permanently, it is not a recession. GDP must decline and then recover in order for there to have been a recession. 4 criteria for there to have been a recession: 1. amplitude (depth and rebound) 2. duration 3 displacement 3. displacement 4. diffusion Rules of thumb combine duration with one of the other three
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EC 400 2 Rule of Thumb 1 Amplitude (and duration) Real GDP must decline at least two quarters. • Industrial Production must decline for at Industrial Production must decline for at least 6 months. Rule of Thumb 2 Displacement Total employment declines by 1.5% • The unemployment rate increase by 200 The unemployment rate increase by 200 basis points .
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