Business Cycles Empirical Properties. What do we mean by “The Business Cycle”?
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Transcript of Business Cycles Empirical Properties. What do we mean by “The Business Cycle”?
Business Cycles
Empirical Properties
What do we mean by “The Business Cycle”?
Gross Domestic Product: 1947-2003
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1/1/47 1/1/54 1/1/61 1/1/68 1/1/75 1/1/82 1/1/89 1/1/96 1/1/03
Gross Domestic Product: 1947-2003
• Since WWII, Nominal GDP has grown at an average annual rate of 6.8%
Gross Domestic Product: 1947-2003
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Level Growth
Gross Domestic Product: 1947-2003
• Since WWII, Nominal GDP has grown at an average annual rate of 6.8%
• However, we know that some of this growth is simply due to prices.
Nominal vs. Real GDP: 1947-2003
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What do we mean by “The Business Cycle”?
• Since WWII, real GDP in the US has grown an average of 3.5% per year. (The remaining 3.3% is a pure inflation effect)
Real GDP: 1947-2003
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-15-10
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VALUE Growth
Detrending
• We can take any macroeconomic variable and break it down into 4 distinct frequencies:– Growth (Many Years)
Detrending
• We can take any macroeconomic variable and break it down into 4 distinct frequencies:– Growth (Many Years)– Business Cycle (1-2 Years)
Detrending
• We can take any macroeconomic variable and break it down into 4 distinct frequencies:– Growth (Many Years)– Business Cycle (1-2 Years)– Seasonal (Months)
Detrending
• We can take any macroeconomic variable and break it down into 4 distinct frequencies:– Growth (Many Years)– Business Cycle (1-2 Years)– Seasonal (Months)– Noise (< Month)
Detrending
• Before we can do any statistical tests, we must remove the growth component from the data (note: the seasonal component has already been removed)
• However, to do this, we need to know what the what the growth component is……this is very tricky! (Example: Global Warming)
Hypothesis 1: Linear Growth
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Hypothesis 1: Linear Growth
y = 38.447x + 549.74R2 = 0.9597
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Detrended?
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Level Deviation
Stationary Series
• If we have detrended properly, then the residual should be stationary (i.e. constant over time)
• While there are statistical tests to determine stationarity, we will rely on the “eyeball method”!
Hypothesis 2: Exponential Growth
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Hypothesis 2: Exponential Growth
y = 1644.6e0.0083xR2 = 0.9946
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Deviations From Trend
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What do we mean by “The Business Cycle”?
• Since WWII, the US has experienced 11 recessions (followed by 11 expansions).
What do we mean by “The Business Cycle”?
• Since WWII, the US has experienced 11 recessions (followed by 11 expansions).
• The average contraction lasts 11 months while the average expansion lasts 15 months.
What do we mean by “The Business Cycle”?
• Since WWII, the US has experienced 11 recessions (followed by 11 expansions).
• The average contraction lasts 11 months while the average expansion lasts 15 months.
• Empirically, each of these recessions (and expansions) look “similar”
Characteristics of Business Cycles
• When we say that all recessions/expansions “look similar”, we mean that there seem to be consistent statistical relationships between GDP and the behavior of other economic variables.
Characteristics of Business Cycles
• When we say that all recessions/expansions “look similar”, we mean that there seem to be consistent statistical relationships between GDP and the behavior of other economic variables.
• Correlation (procyclical, countercyclical)
Characteristics of Business Cycles
• When we say that all recessions/expansions “look similar”, we mean that there seem to be consistent statistical relationships between GDP and the behavior of other economic variables.
• Correlation (procyclical, countercyclical)
• Timing (leading, coincident, lagging)
Characteristics of Business Cycles
• When we say that all recessions/expansions “look similar”, we mean that there seem to be consistent statistical relationships between GDP and the behavior of other economic variables.
• Correlation (procyclical, countercyclical)
• Timing (leading, coincident, lagging)
• Relative Volatility
% Deviations From Trend
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GDPInvestment
% Deviations From Trend
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25
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GDPInvestment
GDP vs. Investment
• Std. Dev. (Y) = 4.09
• Std. Dev. (I) = 10.92
• CORR(Y,I) = .55
GDP vs. Investment
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CORR
GDP vs. Investment
• Std. Dev. (Y) = 4.09
• Std. Dev. (I) = 10.92
• CORR(Y,I) = .55
• Investment is Procyclical and is Coincident with GDP
% Deviations From Trend
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%G
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%Y
Govt GDP
GDP vs. Government Purchases
• Std. Dev. (Y) = 4.09
• Std. Dev. (G) = 11.2
• CORR(Y,G) = .58
GDP vs. Government Purchases
0.52
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-4 -3 -2 -1 0 1 2 3 4
CORR
GDP vs. Government Purchases
• Std. Dev. (Y) = 4.09• Std. Dev. (G) = 11.2• CORR(Y,G) = .58
• Government Purchases is Procyclical and Leading