Lecture 9 - 11/11/2009 BUSINESSCYCLEMEASUREMENT EC205.01...

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11/11/2009 1 BUSINESS CYCLE MEASUREMENT EC205.01 FALL 2009 ALPER 1 Outline y Business cycle facts y Regularities in GDP fluctuations. y Comovement y Behavior of Key Macroeconomic Variables y Short run vs. long run y Aggregate demand y Aggregate supply y Effects of shocks EC205.01 FALL 2009 ALPER 2 Business Cycle Measurement y We will deal with models to study business cycles. y But how do we measure business cycles? y You know how GDP, aggregate prices, savings, wealth, unemployment, etc. are measured. y Need to examine the regularities in the relationships among aggregate variables as thefluctuate over time. y Business cycles are, in fact, quite irregular in that they are unpredictable… y Difficult for forecasters to predict the timing of an upturn or downturn y … but business cycles are quite regular in terms of comovements y Macroeconomic variables move together in highly predictable ways EC205.01 FALL 2009 ALPER 3
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11/11/2009 2 Regularities in GDP Fluctuations y Business Cycles are fluctuations about trend in real GDP. y The turning points in the deviations of real GDP from trend are peaks and trough troughs . y Persistent positive deviations from trend are booms and persistent negative deviations from trend are recessions. EC205.01 FALL 2009 ALPER 4 Idealized Business Cycles EC205.01 FALL 2009 ALPER 5 Deviations From Trend in Real GDP y They are irregular y There is no regularity in the amplitude of fluctuations in real GDP about trend. y There is no regularity in the frequency of fluctuations in real GDP about trend. y They are persistent y When GDP is above trend, it stays above trend, and vice versa. y Important for short term economic forecasting. EC205.01 FALL 2009 ALPER 6
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11/11/2009 3 Recall: TRENDS AND SEASONALITY y Y t denotes RGDP at time t y Quarterly data y Decompose: Y t = S t + T t + I t Seasonal Trend (long run) Irregular (short run, cyclical) EC205.01 FALL 2009 ALPER 7 Percentage Deviations from Trend in Real GDP from 1947–2006 in the U.S. EC205.01 FALL 2009 ALPER 8 RGDP–Turkey–Irregular & Cyclical 1,000,000 1,500,000 2,000,000 Turkish Real GDP Cyclical Factors (1987-2008) -3000 -2000 -1000 0 88 90 92 94 96 98 00 02 04 06 08 EC205.01 FALL 2009 ALPER 9 -2,000,000 -1,500,000 -1,000,000 -500,000 0 500,000 88 90 92 94 96 98 00 02 04 06 08 HP detrended RGDP
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11/11/2009 4 COMOVEMENT y While RGDP fluctuates in irregular patterns, macroeconomic variablesfluctuate together in patterns that exhibit strong regularities… y Time series data y Two variables at a time y Good starting point: plot the data y Time series plots y Scatter plots y Macroeconomists are often interested in how an individual macroeconomic variable comoves with real GDP EC205.01 FALL 2009 ALPER 10 Time Series Plots of x and y EC205.01 FALL 2009 ALPER 11 Scatter Plots: y and x EC205.01 FALL 2009 ALPER 12
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11/11/2009 5 Correlation With Real GDP y If the deviations from trend in a macroeconomic variable are positively (negatively) correlated with the deviations from trend in real GDP, then that variable is li tl i ) procyclical ( countercyclical ).
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Lecture 9 - 11/11/2009 BUSINESSCYCLEMEASUREMENT EC205.01...

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