Business Cycles: Main Features and Stylized Facts
As we noted earlier, the main objective of macroeconomic analysis is to
provide coherent and robust explanations of aggregate movements of output,
employment and the price level, in both the short run and the long run. We
have also drawn attention to the major research programmes, or schools of
thought which attempt to explain such movements, that emerged following
the publication of Keynes’s (1936) General Theory (Snowdon and Vane,
The real business cycle school 305
1997a). Any assessment of a particular theory must take into account its
ability to explain the main features and ‘stylized facts’ which characterize
macroeconomic instability (see Greenwald and Stiglitz, 1988).
By ‘stylized facts’ we mean the broad regularities that have been identified
in the statistical property of economic time series. The identification of the
major ‘stylized facts’ relating to business cycle phenomena is a legitimate
field of enquiry in its own right (see Zarnowitz, 1992a, 1992b). In the USA
the National Bureau of Economic Research, founded in 1920, pioneered
research into business cycle phenomena, the landmark work being Measuring
Business Cycles by Arthur Burns and Wesley Mitchell, published in 1946. In
this book Burns and Mitchell provide their classic definition of business
cycles:
Business cycles are a type of fluctuation found in the aggregate economic activity
of nations that organise their work mainly in business enterprises. A cycle consists
of expansions occurring at about the same time in many economic activities,
followed by similarly general recessions, contractions, and revivals which merge
into the expansion phase of the next cycle; this sequence of changes is recurrent
but not periodic, in duration business cycles vary from more than one year to ten
or twelve years.
The identification by Burns and Mitchell and subsequent research of comovements
of economic variables behaving in a predictable way over the
course of the business cycle led Lucas (1977) to claim that ‘with respect to
the qualitative behaviour of co-movements among series (economic variables)
business cycles are all alike’. This is an attractive characteristic for the
economic theorist because ‘it suggests the 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’ (Lucas, 1977, p. 10). Although many economists would
not go this far, it is obvious that theoretical explanations of business cycle
phenomena must be generally guided by the identified statistical properties of
the co-movements of deviations from trend of the various economic aggregates
with those of real GDP. The co-movement of many important economic
variables in a predictable way is an important feature of business cycles.
While business cycles are not periodic (that is, they vary in their length and
do not occur at predictable intervals), they are recurrent (that is, they repeatedly
occur in industrial economies). How well a particular theory is capable
of accounting for the major stylized facts of the business cycle will be a
principal means of evaluating that theory. As Abel and Bernanke (2001,
p. 284) have argued, ‘to be successful, a theory of the business cycle must
explain the cyclical behaviour of not just a few variables, such as output and
employment, but of a wide range of key economic variables’.
Business cycles have been a major feature of industrialized economies for
the last 150 years. The textbook description of a typical business cycle
highlights the phases of a business cycle, from trough through the expansionary
phase to peak, followed by a turning point leading to a recessionary phase
where aggregate economic activity contracts. Within this general cyclical
pattern, what are the key business cycle ‘stylized facts’ which any viable
macroeconomic theory must confront? Here we present only a brief summary
of the research findings (for a more detailed discussion see Lucas, 1981a;
Blanchard and Fischer, 1989; Zarnowitz, 1992a; Danthine and Donaldson,
1993; Simkins, 1994; Els, 1995; Abel and Bernanke, 2001; Ryan, 2002).
Within macroeconomics there is a great deal of controversy about the
causes of aggregate fluctuations in economic activity. However, according to
Abel and Bernanke (2001), there is a reasonable amount of agreement about
the basic empirical business cycle facts. Even though no two business cycles
are identical, they do tend to have many features in common. The main
‘stylized facts’, as summarized by Abel and Bernanke, are classified according
to both direction and timing relative to the movement of GDP. With
respect to the direction of movement, variables that move in the same direction
(display positive correlation) as GDP are procyclical; variables that
move in the opposite direction (display negative correlation) to GDP are
countercyclical; variables that display no clear pattern (display zero correlation)
are acyclical. With respect to timing, variables that move ahead of GDP
are leading variables; variables that follow GDP are lagging variables; and
variables that move at the same time as GDP are coincident variables.
Table 6.1 indicates that the main stylized facts, as set out by Abel and
Bernanke (2001), show that output movements tend to be correlated across
all sectors of the economy, and that industrial production, consumption and
investment are procyclical and coincident. Government purchases also tend
to be procyclical. Investment is much more volatile over the course of the
business cycle than consumption, although spending on consumer durables is
strongly procyclical. Employment is procyclical and unemployment countercyclical.
The real wage and average labour productivity are procyclical,
although the real wage is only slightly procyclical. The money supply and
stock prices are procyclical and lead the cycle. Inflation (and by implication
the price level) and nominal interest rates are procyclical and lagging while
the real interest rate is acyclical. As we shall see, this ‘agreement’ about the
stylized facts has implications for our assessment of the competing theories.
However, deciding what are the ‘facts’ is certainly not uncontroversial (see
Ryan and Mullineux, 1997; Ryan, 2002).
As we noted earlier, the main objective of macroeconomic analysis is to
provide coherent and robust explanations of aggregate movements of output,
employment and the price level, in both the short run and the long run. We
have also drawn attention to the major research programmes, or schools of
thought which attempt to explain such movements, that emerged following
the publication of Keynes’s (1936) General Theory (Snowdon and Vane,
The real business cycle school 305
1997a). Any assessment of a particular theory must take into account its
ability to explain the main features and ‘stylized facts’ which characterize
macroeconomic instability (see Greenwald and Stiglitz, 1988).
By ‘stylized facts’ we mean the broad regularities that have been identified
in the statistical property of economic time series. The identification of the
major ‘stylized facts’ relating to business cycle phenomena is a legitimate
field of enquiry in its own right (see Zarnowitz, 1992a, 1992b). In the USA
the National Bureau of Economic Research, founded in 1920, pioneered
research into business cycle phenomena, the landmark work being Measuring
Business Cycles by Arthur Burns and Wesley Mitchell, published in 1946. In
this book Burns and Mitchell provide their classic definition of business
cycles:
Business cycles are a type of fluctuation found in the aggregate economic activity
of nations that organise their work mainly in business enterprises. A cycle consists
of expansions occurring at about the same time in many economic activities,
followed by similarly general recessions, contractions, and revivals which merge
into the expansion phase of the next cycle; this sequence of changes is recurrent
but not periodic, in duration business cycles vary from more than one year to ten
or twelve years.
The identification by Burns and Mitchell and subsequent research of comovements
of economic variables behaving in a predictable way over the
course of the business cycle led Lucas (1977) to claim that ‘with respect to
the qualitative behaviour of co-movements among series (economic variables)
business cycles are all alike’. This is an attractive characteristic for the
economic theorist because ‘it suggests the 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’ (Lucas, 1977, p. 10). Although many economists would
not go this far, it is obvious that theoretical explanations of business cycle
phenomena must be generally guided by the identified statistical properties of
the co-movements of deviations from trend of the various economic aggregates
with those of real GDP. The co-movement of many important economic
variables in a predictable way is an important feature of business cycles.
While business cycles are not periodic (that is, they vary in their length and
do not occur at predictable intervals), they are recurrent (that is, they repeatedly
occur in industrial economies). How well a particular theory is capable
of accounting for the major stylized facts of the business cycle will be a
principal means of evaluating that theory. As Abel and Bernanke (2001,
p. 284) have argued, ‘to be successful, a theory of the business cycle must
explain the cyclical behaviour of not just a few variables, such as output and
employment, but of a wide range of key economic variables’.
Business cycles have been a major feature of industrialized economies for
the last 150 years. The textbook description of a typical business cycle
highlights the phases of a business cycle, from trough through the expansionary
phase to peak, followed by a turning point leading to a recessionary phase
where aggregate economic activity contracts. Within this general cyclical
pattern, what are the key business cycle ‘stylized facts’ which any viable
macroeconomic theory must confront? Here we present only a brief summary
of the research findings (for a more detailed discussion see Lucas, 1981a;
Blanchard and Fischer, 1989; Zarnowitz, 1992a; Danthine and Donaldson,
1993; Simkins, 1994; Els, 1995; Abel and Bernanke, 2001; Ryan, 2002).
Within macroeconomics there is a great deal of controversy about the
causes of aggregate fluctuations in economic activity. However, according to
Abel and Bernanke (2001), there is a reasonable amount of agreement about
the basic empirical business cycle facts. Even though no two business cycles
are identical, they do tend to have many features in common. The main
‘stylized facts’, as summarized by Abel and Bernanke, are classified according
to both direction and timing relative to the movement of GDP. With
respect to the direction of movement, variables that move in the same direction
(display positive correlation) as GDP are procyclical; variables that
move in the opposite direction (display negative correlation) to GDP are
countercyclical; variables that display no clear pattern (display zero correlation)
are acyclical. With respect to timing, variables that move ahead of GDP
are leading variables; variables that follow GDP are lagging variables; and
variables that move at the same time as GDP are coincident variables.
Table 6.1 indicates that the main stylized facts, as set out by Abel and
Bernanke (2001), show that output movements tend to be correlated across
all sectors of the economy, and that industrial production, consumption and
investment are procyclical and coincident. Government purchases also tend
to be procyclical. Investment is much more volatile over the course of the
business cycle than consumption, although spending on consumer durables is
strongly procyclical. Employment is procyclical and unemployment countercyclical.
The real wage and average labour productivity are procyclical,
although the real wage is only slightly procyclical. The money supply and
stock prices are procyclical and lead the cycle. Inflation (and by implication
the price level) and nominal interest rates are procyclical and lagging while
the real interest rate is acyclical. As we shall see, this ‘agreement’ about the
stylized facts has implications for our assessment of the competing theories.
However, deciding what are the ‘facts’ is certainly not uncontroversial (see
Ryan and Mullineux, 1997; Ryan, 2002).
No comments:
Post a Comment