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Business Cycle Measurement Definition Properties of BC BC Facts • Business Cycles are the cyclical movement of GDP over time. • Phases of the Business Cycle - Peak (Boom) - Trough (Depression) - Expansion (Recovery) - Contraction (Recession) Figure 3.2 Percentage Deviations from Trend in Real GDP from 1947--2006 Figure 3.1 Idealized Business Cycles US. Business Cycles • (Robert Lucas, 1995 Nobel Laureate, Understanding Business Cycles) • “Though there is absolutely no theoretical reason to anticipate it, one is lead by the facts to conclude that, with respect to the qualitative behavior of comovements among series, business cycles are all alike…” • (Lucas, continued) (“…it suggests a possibility of a unified explanation of business cycles, grounded in the general laws governing market economies, rather than in political or institutional characteristics specific to particular countries or periods.”) • Co-Movement An economic variable is (1) Procyclical – moves in same direction as GDP. (2) Countercyclical – moves in opposite direction as GDP (3) Acyclical – no observed relation to GDP Figure 3.4 Correlations Between Variables y and x Figure 3.3 Time Series Plots of x and y • Timing An economic variable is (1) Leading – changes before GDP. (2) Lagging – changes after GDP (3) Co-Incident – changes at same time as GDP Figure 3.7 Leading and Lagging Variables Figure 3.8 Real GDP (colored line) and the Index of Leading Economic Indicators (black line) for 1959–2006 US Business Cycle Facts • Persistence: GDP above trend today above trend tomorrow. • Aggregate expenditures (C, I, G, NX) are procyclical. C is less volatile than Y, I is more volatile that Y. • Employment (N) is procyclical Unemployment is countercyclical • Labor Productivity (Y/N) is procyclical Little correlation between w and N. Slightly leads GDP. • Persistence of business cycles: - There is a high correlation between current GDP and one-period lagged GDP: Corr (YtYt-1) = 0.86 - If GDP is above trend by X amount today, it will likely be above trend by 86%X tomorrow. Figure 3.9 Real Consumption (black line) and Real GDP (colored line) Figure 3.10 Real Investment (black line)and Real GDP (colored line) Figure 3.14 Employment (black line) and Real GDP (colored line) Figure 3.15 Average Labor Productivity (black line) and Real GDP (colored line) for 1948–2003 • Money supply (Ms) growth is procyclical and leading. • Price Level (P) is countercyclical/coincident or procyclical/lagging (pre & post-1947) Figure 3.13 Money Supply (black line) and Real GDP (colored line) for the Period 1959–2003 Figure 3.11 Scatter Plot for the Percentage Deviations from Trend in the Price Level (the Implicit GDP Price Deflator) and Real GDP Figure 3.12 Price Level and GDP Table 3.1 Correlation Coefficients and Variability Table 3.2 Summary of Business Cycle Facts