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Unformatted text preview: An Introduction to Business Cycles Pamela Labadie Spring 2010 The term business cycle refers to a set of common comovements across a wide range of macroeconomic variables such as output, employment, consumption, prices and investment. A business cycle exhibits two important features: 1. Persistence : When the variable is measured as deviation from trend, the ups and downs in a series display a good deal of persistence (more formally the correlation of observations one period apart is large and positive). 2. Common Comovements : Outputs in different sectors appear to move together. This means that the different components of consumption and investment move in a specific pattern with respect to real GDP. Two important features of a business cycle are 1. The duration of a cycle is the number of months from peak to peak (or trough to trough). The duration of a cycle varies greatly. We have had very short cycles, for example the early 1980s, and very long cycles, such as the 1990s (Clinton administra- tion). 2. The amplitude of a cycle is the deviation from trend. The amplitude varies greatly, with some cycles quite mild (low amplitude) and others quite severe (high amplitude). Some economists believe the current recession has a high amplitude. Time series are put into 3 categories: 1. Procyclical- Variables that move in the same direction over the cycle as real output are called procyclical . Examples are consumption and investment....
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This note was uploaded on 02/01/2011 for the course ECON 121 taught by Professor Labadie during the Fall '10 term at GWU.
- Fall '10