7. business cycle facts

7. business cycle facts - Business Cycle Facts 7 October...

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Business Cycle Facts 7 October 2010 1 Reading Chapter 8 of Abel/Bernanke/Croushore 2 What is a business cycle? 1. Business cycles are f uctuations of aggregate economic activity, not of a speci F c variable. 2. There are expansions and contractions. 3. Economic variables show comovement–they have regular and predictable pat- terns of behavior over the course of the business cycle. 4. The business cycle is recurrent, but not periodic. 5. The business cycle is persistent. 3 Fluctuations of aggregate economic activity Still as a general rule, it is easiest to focus on a few or just a single variable — real GDP, if real GDP should be the most comprehensive measure of aggregate economic activity. 4E x p a n s i o n s a n d c o n t r a c t i o n s Aggregate economic activity (e.g. real GDP) declines in a contraction (known as a recession) until it reaches a trough. After a trough, activity increases in an expansion or boom until it reaches a peak. The sequence from one peak to the next, or from one trough to the next, is a business cycle. Peaks and troughs are turning points, and they clearly are of particular interests to businessmen, politicians, F
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Figure 1: Business cycles A particularly severe recession is called a depression. The recession in the 1930s is known as the Great Depression. Suppose that we focus on the movement of real GDP as a measure of aggregate economic activity. By f gure 1, business cycle F uctuations refer to the F uctua- tions in real GDP around some normal growth path or its long—run trend. In this interpretation, we can decompose the movements of real GDP over time into: 1. the overall upward movement or trend in real GDP, as re F ecting long—term economic growth. 2. shorter—term F uctuations around the trend, stemming from the business cycles; i.e., from expansions and recessions. More concretely, we write real GDP = trend real GDP + cyclical component of real GDP 2
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Figure 2: Real GDP in Hong Kong Figure 3: Real GDP in the USA 3
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To break down real GDP into trend and cycle, we start by estimating the trend; i.e., to f t a smooth line to the data. One possibility is to assume that the growth rate is constant in the trend. Then trend real GDP is de f ned as e Y t = e Y 0 (1 + g ) t , where g is the trend growth rate. If trend real GDP should grow at a constant rate, ln e Y t =l n e Y 0 + t ln (1 + g ) ' ln e Y 0 + tg β 0 + β 1 t b z t a linear function of calendar time, where t is measured in quarter of a year.
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7. business cycle facts - Business Cycle Facts 7 October...

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