Fluctuations_in_Economic_Variables

# Fluctuations_in_Economic_Variables - HAKAN YILMAZKUDAY EC...

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HAKAN YILMAZKUDAY EC 601 ECONOMIC GROWTH LECTURE NOTES WEEK 6 FLUCTUATIONS IN ECONOMIC VARIABLES Business cycle theory tries to explain the observable fluctuations in major economic variables such as national product, unemployment rate or inflation rate. Its aim is to model the dynamics of oscillations through a model economy. However, it is not an easy process to capture the common patterns of the real life variables by just observing the empirical fluctuations. The difficult part of the process comes from isolating the facts that lead to oscillatory behavior. In the literature, there are common approaches used to capture the facts that lead to oscillatory behavior. We can summarize the procedure by the following three steps: It had to be clarified whether fluctuations in economic variables are periodic and whether different patterns can be distinguished. For instance, a 40-60 year cycle can be explained by technical innovations, but a 2-4 year cycle cannot. It had to be clarified which variables should be measured. The measurement procedure also has to be described.

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Fluctuations in Economic Variables 2 If the first two steps hold, then the common features of empirical business cycle must be isolated. These common features are called the stylized facts . Gabisch and Lorenz (1989) list the most influential contributions to the business cycle theory as follows: Kondratieff Cycles : Given the name of the observer, these cycles occur in a period of 40-60 years. The leading forces of these cycles can be listed as technological innovations and subsequent structural changes. Juglar Cycles : Given the name of the observer, these cycles occur in a period of 7 to 11 years. These medium waves seemed to correspond with a life cycle of investment goods which initiated fluctuations in the GNP, inflation rate and the rate of unemployment. These cycles are considered to be true business cycles in the sense that they deal with fluctuations in trade activities. Kitchin Cycles: Given the name of the observer, these cycles occur in a period of 2 to 4 years. They can also be considered as short waves and deal with random shocks that lead to fluctuations in GNP, inflation rate and unemployment. In these cycles, the most popular one is Juglar cycles since they let observes to investigate the most interesting economic variables such as the national product, the aggregate price level and the unemployment rate. The common feature of the models that tries to capture the oscillatory behavior of the economic variables is that they concentrate on economic variables which exhibit an upward motion for a considerable time interval followed by a downswing and an eventual recovery.
Fluctuations in Economic Variables 3 Phenomena such as the structural change in a single industry, economy-wide technical progress or short-term stochastic influences are usually out of interest.

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## This note was uploaded on 01/11/2012 for the course ECO 601 taught by Professor Hakanyilmazkuday during the Fall '11 term at FIU.

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Fluctuations_in_Economic_Variables - HAKAN YILMAZKUDAY EC...

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