Business Cycle

Definition

Short-term Fluctuation around a long-term trend in Economic Growth. This concept is related to the ideas of Recession (Bust) and Expansion (Boom). This conclusion incorporates the assumption (paradigm) that there is a long-term sustainable growth that can be acheived / that is optimal to be acheived. Therefore deviations from this trend would cause pressures in the economy that would unravel and cause a correction to a boom, or period of "pent-up demand during a bust."

Alternative

James Hartley explains a view of the business cycle, in the tradition of Real Business Cycle theorists, which says that the economy is always in a state of pareto optimality. For various reasons things do not line up during a downturn and during a particularly fourtunate period things are just going better.

A parallel to this view is the one simply stated as Clustering where the economy is seen to go through cycles just like an office goes through cycles during the course of a day. To clarify this analogy: At night the office is less productive than it is during "office hours" where all the employees are present. It might make some sense that spreading out the workers over all 24 hours would make better use of space and of capital, but then the transparency to the customer might be lost. At night school rooms spend sever hours empty and during the day they are sometimes overcrowded -- typically we assume there is some benefit to clustering.

Cooper and Haltiwanger

Automobiles and the National Industrial Recovery Act: Evidence on Industry Complementarity

NIRA succeed on shifting the nash equilibrium for coordination across the automobile and component supplier industries.

Before act -- automobile shows happened in January -- slow down in automobile purchases in months prior to the showing of new models.

<evidence in favor of an industry-wide "new model year" 1924>: "The main argument in favor of the synchronization concerned the problems of retailing cars when new models are being presented throughout the calendar year." -- p. 1047

The NIRA did not last 6 months before it was ruled unconstitutional (the point was to move a major employer off of the typical cycle to lessen the severity of seasonal recessions)

After act -- Shows held in November, and we see that the focal point has change and the equilibrium had changed.

p. 1051 has a great graph showing the success of this intervention to a new trough in the production and sales of cars occurring earlier in the year.

Conclusion: The NIRA offered a form of pre-play communication between auto makers and their industries.

Miron and Beaulieu

Some main points:

• 1) "Determining the magnitude of preference shifts is difficult because it requires, in effect, consistent estimation of consumer preferences. As a rule, valid instruments for the estimation of these preferences are difficult to find. Gauging the approximate magnitude of seasonal preference shifts, however, is less difficult. To begin, a priori information suggests that events like Christmas and other holidays shift preferences, either for broad categories of goods or, in some cases, for particular goods." -- p. 55
• 2) "...however, seasonal dummies are valid instruments as they are uncorrelated with the error byt correlated with the righthand side variables. The IV (Instrumental Variable) approach produces the same coefficient estimates as regressing the output on the seasonal components of output and labor, but it produces the correct standard errors." -- p. 56
• 3) p. 58 has a table showing cross country large positive December effects and large negative growth in January. This holds for the southern and northern hemispheres. (Spain is an exception for the December effect).
• 4) Part III-B cites another series of papers paper (Cooper and Haltiwanger 1992, 1993; and Hall 1991) coordination is not weather or calendar dependant. In 1934 when the auto maker's new vehicle year was changed to accommodate the National Industrial Recovery Act of 1935, the seasonal changes moved with the new calendar date. <This seems to lead to evidence supporting Cowen's clustering argument>
• 5) Part IV-A builds the argument that fluctuations correspond to labor and capital utilization. Part B suggests that smoothing is not seen in manufacturing.

These results are suggested to give insight to the long-run business cycle by way of comparison.

Kydland and Prescott

Time to Build and Aggregate Fluctuations (1982)

Key Points:

• Period of Production is important
• explain comovement
• explain persistance

Problems:

• The effect that it predicts are not large enough to account for observable fluctuations.

Friedrich Von Hayek

His major contribution towards business cycle theory involved over-investment. Hayek believed that shortages in capital would bring about downturns.

• Depressions occur when investment funds are not readily available. This causes projects that have already been constructed to come to a halt due to lack of funds for complementary projects necessary for the completion of the project.

See Also:

• Macroeconomics
• Real Business Cycles theory

Sources:

1. Snowdon, Brian and Howard R. Vane. 2005: Edward Elgar Publishing;Modern Macroeconomics: Its Origins, Development And Current State, ISBN 1845422082
2. Hartley, James E., Kevin D. Hoover, and Kevin D. Salyer 1998: Real Business Cycles: A Reader Routledge, ISBN 0415171547
3. Russell Cooper; John Haltiwanger. The Quarterly Journal of Economics, Vol. 108, No. 4. (Nov., 1993), pp. 1043-1071. Stable URL:
4. Jeffrey A. Miron; J. Joseph Beaulieu. The Review of Economics and Statistics, Vol. 78, No. 1. (Feb., 1996), pp. 54-66. Stable URL:
5. Finn E. Kydland; Edward C. Prescott. Econometrica, Vol. 50, No. 6. (Nov., 1982), pp. 1345-1370.

Stable URL:

• Tyler Cowen's lectures, GMU Fall 2005