Lecture 13Business CyclesNoah WilliamsUniversity of Wisconsin - MadisonEconomics 312Spring 2010Williams Economics 312New Topic: Economic FluctuationsU.S. economy fluctuates over time.How can we build models to think about it?Do we need different models than before to do so?Traditionally the answer was yes. Nowadays the answer isno.We will model business cycles using an equilibriumperspective. Not a case of market breakdown as intraditional Keynesian analysis.But first a look at the data we want to explain.Williams Economics 312Growth and Business CyclesHow different are long-run growth and the business cycle?Changes in Output/Worker Secular Growth Business CycleDue to capital 1/3 0Due to labor 0 2/3Due to productivity 2/3 1/3We will use the same models with a slightly different focus.View growth models as determining the trend in the data,now analyze business cycles as deviations from trend.Williams Economics 312Business Cycle Definitions and RegularitiesRecession: Period of declining GDP (relative to trend).Boom: Period of increasing GDP (relative to trend).Peak: End of boom, beginning of recession.Trough: End of recession, beginning of boom.No regular amplitude or frequency of fluctuations.But there are some regularities or “business cycle facts”:Correlations (comovements)Relative variabilitiesPhase: leading/coincident/laggingWilliams Economics 312Business Cycles in USUS experience: more volatile business cycles pre-war,moderation in fluctuations post-war and especially post1984.Of obvious relevance now. On December 1, 2008 NBERdetermined US entered a recession in December 2007.Issue of stabilization policy for business cycles: Should Fedcut rates? Should govt. cut taxes? Should governmentincrease spending?Williams Economics 312Copyright © 2008 Pearson Addison-Wesley. All rights reserved.3-4Figure 3.1 Idealized Business CyclesWilliams Economics 312Copyright © 2008 Pearson Addison-Wesley. All rights reserved.3-6Figure 3.2 Percentage Deviations from Trend in Real GDP from 1947–2006Williams Economics 312Percentage Change in Real GDPWilliams Economics 312NBER Business Cycle Dates US Business Cycle Expansions and Contractions ¹ Contractions (recessions) start at the peak of a business cycle and end at the trough. BUSINESS CYCLE REFERENCE DATES DURATION IN MONTHS Peak Trough Contraction Expansion Cycle Quarterly dates are in parentheses Peak to Trough Previous trough to this peak Trough from Previous Trough Peak from Previous Peak June 1899(III) September 1902(IV) May 1907(II) January 1910(I) January 1913(I) August 1918(III) January 1920(I) May 1923(II) October 1926(III) August 1929(III) May 1937(II) February 1945(I) November 1948(IV) July 1953(II) August 1957(III) April 1960(II) December 1969(IV) November 1973(IV) January 1980(I) July 1981(III) July 1990(III) March 2001(I) December 2007 (IV) December 1900 (IV) August 1904 (III) June 1908 (II) January 1912 (IV) December 1914 (IV) March 1919 (I) July 1921 (III) July 1924 (III) November 1927 (IV) March 1933 (I) June 1938 (II) October 1945 (IV) October 1949 (IV) May 1954 (II) April 1958 (II) February 1961 (I) November 1970 (IV) March 1975 (I) July 1980 (III) November 1982 (IV) March 1991(I) November 2001 (IV) 18 23 13 24 23 7 18 14 13 43 13 8 11 10 8 10 11 16 6 16 8 8 24 21 33 19 12 44 10 22 27 21 50 80 37 45 39 24 106 36 58 12 92 120 73 42 44 46 43 35 51 28 36 40 64 63 88 48 55 47 34 117 52 64 28 100 128 42 39 56 32 36 67 17 40 41 34 93 93 45 56 49 32 116 47 74 18 108 128 81 Williams Economics 312Copyright © 2008 Pearson Addison-Wesley. All rights reserved.3-7Figure 3.3 Time Series Plots of x and yWilliams Economics 312Copyright © 2008 Pearson Addison-Wesley. All rights reserved.3-12Figure 3.7 Leading and Lagging VariablesWilliams Economics 312Copyright © 2008 Pearson Addison-Wesley. All rights reserved.3-13Figure 3.8 Percentage Deviations from Trend in Real GDP (colored line) and the Index of Leading Economic Indicators (black line) for 1959–2006Williams Economics 312Copyright © 2008 Pearson Addison-Wesley. All rights reserved.3-15Figure 3.9 Percentage Deviations from Trend in Real Consumption (black line) and Real GDP (colored line) 1947–2006Williams Economics 312Copyright © 2008 Pearson Addison-Wesley. All rights reserved.3-16Figure 3.10 Percentage Deviations from Trend in Real Investment (black line) and Real GDP (colored line)Williams Economics 312Copyright © 2008 Pearson Addison-Wesley. All rights reserved.3-18Figure 3.12 Price Level and GDPWilliams Economics 312Copyright © 2008 Pearson Addison-Wesley. All rights reserved.3-19Figure 3.13 Percentage Deviations from Trend in the Money Supply (black line) and Real GDP(colored line) for the Period 1959–2006.Williams Economics 312Copyright © 2008 Pearson Addison-Wesley. All rights reserved.3-20Figure 3.14 Percentage Deviations from Trend in Employment (black line) and Real GDP (colored line)Williams Economics 312Unemployment Rate, 1948-2008Williams Economics 312Copyright © 2008 Pearson Addison-Wesley. All rights reserved.3-21Figure 3.15 Percentage Deviations from Trend in Average Labor Productivity (black line) andReal GDP (colored line) for 1948–2006Williams Economics 312Copyright © 2008 Pearson Addison-Wesley. All rights reserved.3-23Table 3.1 Correlation Coefficients and Variability of Percentage Deviations from TrendWilliams Economics 312Copyright © 2008 Pearson Addison-Wesley. All rights reserved.3-24Table 3.2 Summary of Business Cycle FactsWilliams Economics