Download Lecture 1 - Introduction

Figure1 UK GDP Quarterly 1963:3-2001:1and its long
run tend (----)
12.2
12
11.8
11.6
11.4
1999:3
1996:3
1993:3
1990:3
1987:3
1984:3
1981:3
1978:3
1975:3
1972:3
1969:3
1966:3
11.2
1963:3
Log of Output
12.4
The Stylised Facts of the
Business Cycle
Ref: Barro & Grilli Ch.1
Ryan (2002)
Ryan & Mullineux (1997)
Figure1 UK GDP Quarterly 1963:3-2001:1and its long
run tend (----)
1. Output is growing
over time
12.2
12
11.8
11.6
But the rate of
growth fluctuates.
11.4
1999:3
1996:3
1993:3
1990:3
1987:3
1984:3
1981:3
1978:3
1975:3
1972:3
1969:3
1966:3
11.2
1963:3
Log of Output
12.4
Figure1 UK GDP Quarterly 1963:3-2001:1and its long
run tend (----)
However, the trend is
upwards
12.2
12
11.8
11.6
Can we identify the
trend?
11.4
1999:3
1996:3
1993:3
1990:3
1987:3
1984:3
1981:3
1978:3
1975:3
1972:3
1969:3
1966:3
11.2
1963:3
Log of Output
12.4
Figure1 UK GDP Quarterly 1963:3-2001:1and its long
run tend (----)
12.2
12
11.8
11.6
11.4
1999:3
1996:3
1993:3
1990:3
1987:3
1984:3
1981:3
1978:3
1975:3
1972:3
1969:3
1966:3
11.2
1963:3
Log of Output
12.4
Figure1 UK GDP Quarterly 1963:3-2001:1and its long
run tend (----)
12.2
12
11.8
11.6
11.4
1999:3
1996:3
1993:3
1990:3
1987:3
1984:3
1981:3
1978:3
1975:3
1972:3
1969:3
1966:3
11.2
1963:3
Log of Output
12.4
Figure1 UK GDP Quarterly 1963:3-2001:1and its long
run tend (----)
12.2
12
11.8
11.6
11.4
1999:3
1996:3
1993:3
1990:3
1987:3
1984:3
1981:3
1978:3
1975:3
1972:3
1969:3
1966:3
11.2
1963:3
Log of Output
12.4
Figure1 UK GDP Quarterly 1963:3-2001:1and its long
run tend (----)
12.2
12
11.8
11.6
11.4
1999:3
1996:3
1993:3
1990:3
1987:3
1984:3
1981:3
1978:3
1975:3
1972:3
1969:3
1966:3
11.2
1963:3
Log of Output
12.4
2000:2
1995:1
1989:4
1984:3
1979:2
1974:1
1968:4
1963:3
%^ Deviation from LR
Trend
UK Business Cycle
0.06
0.04
0.02
0
-0.02
-0.04
2000:2
1995:1
1989:4
1984:3
1979:2
1974:1
1968:4
1963:3
%^ Deviation from LR
Trend
UK Business Cycle
0.06
0.04
0.02
0
-0.02
-0.04
0.06
0.04
0.02
0
-0.02
2000:2
1995:1
1989:4
1984:3
1979:2
1974:1
1968:4
-0.04
1963:3
%^ Deviation from LR
Trend
UK Business Cycle
Q: Why does output fluctuate in this way
0.06
0.04
0.02
0
-0.02
Q: What is is happening to other
variables as output fluctuates
2000:2
1995:1
1989:4
1984:3
1979:2
1974:1
1968:4
-0.04
1963:3
%^ Deviation from LR
Trend
UK Business Cycle
Real national income
Three question:
1. Does XXXX go up when
Output is up, or does it go
down?
O
Output
Called
CORRELATION
Time
Real national income
Two types of question
1. Does XXXX go up when
Output is up, or does it go
down?
O
Output
XXXX is
PROCYCLICAL positive correlation
Time
Real national income
Two types of question
1. Does XXXX go up when
Output is up, or does it go
down?
O
Output
XXXX is COUNTERCYCLICAL - Negative
correlation
Time
Real national income
Q.2 Does XXXX fluctuate by
more or less than Output?
Y
O
Time
Real national income
Q.2 Does XXXX fluctuate by
more or less than Output?
Y
LowStandard
Deviation
O
Time
Real national income
Q.2 Does XXXX fluctuate by
more or less than Output?
Y
HighStandard
Deviation
O
Time
Real national income
Q.3 Does XXXX lead or lag
Output?
O
Output
XXXX is
LEADING
Time
Real national income
Q.3 Does XXXX lead or lag
Output?
O
Output
XXXX is
LAGING
Time
How Do We Characterize the
Business Cycle?
• What other Variables are we interested
in?
• Are they up or down when Output
(GNP/GDP) is up?
• Do they fluctuate more or less than
Output?
• Do they lead or lag output?
• Make a List
The correlation between the cyclical component
of real GDP and the cyclical component of
selected macroeconomic variables in the UK,
1950-90.
0.8
0.9
0.58
0.6
0.4
-0.87
Ryan (2002) (Data: 1963-2001)
Barro and Grilli (1994). (Data 1950-90
/P
*
W
P
R
IR
*
Y
/E
H
U
E
E*
ou
ou
rs
rs
W
RD
*
-0.8
-1
Source:
0.4
0.39
tH
G
To
-0.4
-0.6
0.49
0.17
I
0.2
0
-0.2
C
Correlation
1
0.8
Facts I
• Consumption and investment demand
are highly procyclical.
• Government consumption is weakly
procyclical.
• Employment is pro-cyclicalUnemployment is countercyclical.
• Output expands more than employment
in a boom and falls more than
employment in a recession.
The correlation between the cyclical component
of real GDP and the cyclical component of
selected macroeconomic variables in the UK,
1950-90.
Correlation
1
0.8
0.8
0.9
0.6
0.4
0.2
0
-0.2
0.4
0.26
0.17
C
I
G*
UE
-0.4
-0.6
-0.8
-1
Source:
0.4
Y/E*
RIR
P
-0.58
-0.87
Ryan (2002) (Data: 1963-2001)
Barro and Grilli (1994). (Data 1950-90
W/P*
Facts I (Cont)
• Real Interest rate is Acyclical
• The Price level is COUNTERCYCLICAL
• The real wage is acyclical or weakly procyclical.
The standard deviation of selected
macroeconomic variables, %, UK, 1963-2001.
8
7
std. deviation
7
6
5
3.63
4
3
2
1.54
1.42
Real GDP
Non-Dur
Cons
1.6
1
0
Source: Ryan (2002.
Durable
Cons
Investment Employment
Facts I
Consumer Durables and
Gross investments are, by far,
the most volatile component of real GDP.
Non-durable consumption demand is
relatively stable and fluctuate less that GDP
The correlation between the cyclical component
of real GDP and monetary aggregates and the
GDP deflator in the UK, 1963-1993.
0.6
0.4
0.2
Correlation
0
-0.2
-0.4
-0.6
M0
Source: Barro and Grilli (1994).
M0/P
M4
M4/P
P
Real national income
Countercyclical and leading
prices
Peak
Prices
O
A
Output
|Trough
fig
Time
Which turning
point does A
belong to?
Real national income
Countercyclical and leading
prices
Peak
Prices
O
A
Output
Trough
fig
Time
Inflation rising
but prices are
below trend
St
Dev
Variable
Cross-Correlation of Output with:
X(t+4) X(t+3) X(t+2) X(t+1)
X(t)
X(t-1) X(t-2) X(t-3) X(t-4)
Output
1.54
0.31
0.50
0.65
0.80
1.00
0.80
0.65
0.50
0.30
Non-Durable Cons
1.42
0.19
0.36
0.50
0.64
0.79
0.67
0.59
0.49
0.36
Durable Cons
7.00
0.32
0.50
0.52
0.54
0.60
0.34
0.27
0.19
-0.01
Investment
3.63
0.19
0.32
0.42
0.53
0.66
0.63
0.56
0.50
0.36
prices
2.13
-0.42
-0.54
-0.61
-0.62
-0.61
-0.51
-0.41
-0.26
-0.12
Real Interest Rates
2.44
0.21
0.34
0.41
0.41
0.40
0.28
0.20
0.07
-0.07
14.51
0.23
0.04
-0.17
-0.38
-0.59
-0.74
-0.81
-0.79
-0.69
2.24
-0.48
-0.54
-0.59
-0.55
-0.49
-0.44
-0.36
-0.26
-0.10
Unemployment
Wages
1.Output is growing but fluctuates persistently and
in an apparently systematic way;
2.Employment is procyclical, that is, it moves in
the same direction as output. However, both the
number of people employed and the number of
hours worked fluctuates less than output (that is,
firms are apparently reluctant to hire and fire).
Hence productivity or output per worker is
procyclical and varies considerably over the
cycle;
3.Real Wages are procyclical, though the share of
wages in GNP is countercyclical, that is, the
share of labour in GNP falls as output rises. Thus
real wages rise proportionally less than output in
booms and fall proportionally less in recessions);
4.
Non-durable consumption is
procyclical but fluctuates less than
output. It also leads the cycle slightly,
that is, it rises or falls before output
rises or falls in US data.
5. Consumption of consumer durables
(henceforth durables) and investment
are procyclical but fluctuate more than
output; the former tends to lead the
cycle while investment tends to rise or
fall after (or lag) the change in output;
6. Both narrow money and broad money are
procyclical. Narrow money is
contemporaneous or slightly leading but
broad money does not exhibit a consistent
pattern of lags or leads across countries;
7. The price level is countercyclical and
leading;
8. Interest rates are acyclical (there is no
discernible pattern across business cycles).
1999:3
1996:3
1993:3
1990:3
1987:3
1984:3
1981:3
1978:3
1975:3
1972:3
1969:3
1966:3
1963:3
Log of Output
Figure1 UK GDP Quarterly 1963:3-2001:1 with a linear
trend
12.4
12.2
12
11.8
11.6
11.4
11.2
Review
what you Do Know about
Perfect of
Competition
Microeconomics
Full Information
Perfectly Flexible Prices
px
• Firm
MC = si
px2
px
Industry
S=SMC
AC
px1
D
qx1 qx2
qx
Qx1 Qx2
Qx
Review
of what
you Don’t Know
Perfect
Competition
about Macroeconomics
Full Information
Perfectly Flexible Prices
px
• Microecomics
MACROECONOMICS
S=SMC
P
LRAS
SRAS?
D
Qx1 Qx2
AD
Y
So in IS/LM-AD/AS
• LRAS – Vertical if have
– Perfect Compt.
– Rational Expectations
– Flexible Prices
• SRAS – May be upward sloping if
– Imperfect Competition
– Non-Rational Expectations e.g. Adaptive
– Rigid Prices
WRAP UP
• SO IS/LM-AD/AS is Macroeconomics with
advanced Micro
• This module is easy
• It is Microeconomics with baby micro
• Will show that you can go a long way yo
explaining fluctuations in the economy with just
baby micro
• ITS EASY PEASY LEMON SQUEAZY