Topic 08 - Business Cycles(1) - BUAD 350 Topic 08 Real...

BUAD 350
Topic 08 – Real Business Cycles

Keywords

Characterizing cycles

US business cycle facts

The real business cycle theory

Policy implications

Characterizing Cycles

Business Cycles are recurring but irregular
fluctuations in real GDP around a trend over short
periods of time

The period of time when real GDP is falling is a
contraction or a recession . (A severe recession is
a depression .) The period when real GDP grows is
an expansion or a boom

Characterizing Cycles (contd.)

The entire sequence, measured from peak to peak
or trough to trough is a business cycle

Peaks and troughs are called turning points

These points are catalogued by the National Bureau
of Economic Research (NBER)

Characterizing Cycles (contd.)

The data used to analyze business cycles are
usually organized as quarterly time series of real
GDP, investment, money supply, etc.

Characterizing Cycles (contd.)

We are interested in 2 features of the data:
1
Which variables are most volatile (as measured by the
standard deviation around the trend)?
2
Does a given variable cyclically comove in the same
direction with real GDP ( procyclical ) or in the opposite
direction ( countercyclical )? That is, is the correlation
coefficient with GDP positive or negative?

Non Durable and Service
Consumption
Investment
Durable Goods
Consumption

Business cycles

US Business Cycle Facts

Key facts on US business cycles:
St.Dev. Corr. With
real GDP
Real GNP .016 1.00
Consumption .011 0.74
Investment .070 0.91
Govt. Purchases .022 0.04
Worker hours 0.85
Unemployment rate -0.93
M1 0.30
M2 0.43

Consumption

Figure 8.04 Cyclical behavior of employment

Figure 8.05 Cyclical behavior of unemployment

US Business Cycle: Key Facts

Summary:
–
The average deviation of real GDP from its trend is 1.7% per
quarter
–
Consumption is a lot less volatile than real GDP (Why?)
–
Investment is a lot more volatile than real GDP -- about 4
times as volatile
–
Government purchases are essentially acyclical


Summary:
–
Number of civilians employed and total hours worked are
procyclical
–
The unemployment rate is countercyclical
–
Durable goods consumption is much more volatile than
non-durable goods consumption
–
Which is more volatile?

Colgate-Palmolive, Kellogg

Ford, Dell, Sony
US Business Cycle: Key Facts

How does the 2008 recession compare to
the previous ones?