PIIBP2_LEC1_mau - Part IIB Paper 2 Business Cycle Theory...

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Unformatted text preview: Part IIB Paper 2: Business Cycle Theory LECTURE 1: Stylised Facts About the Business Cycle Mauricio Prado University of Cambridge 18 February 2011 Mauricio Prado (University of Cambridge) IIB P2 - Business Cycles - Lecture 1 18 Feb 2011 1 / 37 Course information E-mail: [email protected] Website: http://www.econ.cam.ac.uk/intranet/faculty/prado/teaching.htm Readings: Sorensen and Whitta-Jacobsen, Introducing Advanced Macroeconomics (ch. 14, 18, 19) Romer, Advanced Macroeconomics, 3rd edition (ch. 4, 6) Articles Mauricio Prado (University of Cambridge) IIB P2 - Business Cycles - Lecture 1 18 Feb 2011 2 / 37 Aim and outline of the course Aim: to introduce the main theories that explain short-run fluctuations in macroeconomic variables Lectures outline: Introduction and stylised facts New Keynesian economics Lucas’ misperceptions model Real business cycle model Mauricio Prado (University of Cambridge) IIB P2 - Business Cycles - Lecture 1 18 Feb 2011 3 / 37 Outline of lecture What is a business cycle Stylised facts Empirical assessment of business cycle summary statistics impulse responses business cycle dates historical analysis Other facts Mauricio Prado (University of Cambridge) IIB P2 - Business Cycles - Lecture 1 18 Feb 2011 4 / 37 What is a business cycle? Business cycles are recurring fluctuations of GDP around its trend over time GDP reflects aggregate production or aggregate expenditure F ( K , N ) = C + I + G + NX Fluctuations are due to shocks to the supply side (production), or the demand side (expenditure), or both Mauricio Prado (University of Cambridge) IIB P2 - Business Cycles - Lecture 1 18 Feb 2011 5 / 37 Why do we care about business cycles? Some argue that the costs of business cycles (i.e. the costs of recessions) are tiny compared to the losses from having low long term growth (i.e. slope of GDP trend) - Lucas, Marshall Lectures 1988 Others argue that there is evidence that business cycle volatility may affect long-term growth the immediate welfare effects of recessions are not the same for everyone: they vary across economic and social classes Mauricio Prado (University of Cambridge) IIB P2 - Business Cycles - Lecture 1 18 Feb 2011 6 / 37 Can we influence and/or prevent the business cycles? Classical/Neoclassical theories: fluctuations driven by supply side (shocks to productivity, preference shocks) markets clear, fluctuations reflect optimal adjustments to exogenous shocks government policies would distort private choices (suboptimal) Keynesian/New Keynesian theories: fluctuations are driven by aggregate demand (money shocks, fiscal shocks, animal spirits) markets do not clear (imperfections, price and wage rigidities) government policies might be desirable To judge the theories we need to identify from the data which shocks (supply or demand) have biggest effects and what are the effects of policy intervention Mauricio Prado (University of Cambridge) IIB P2 - Business Cycles - Lecture 1 18 Feb 2011 7 / 37 Stylised facts UK GDP...
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PIIBP2_LEC1_mau - Part IIB Paper 2 Business Cycle Theory...

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