DSME3080 Macroeconomics

for Managers

Business Cycles
Rao Fu
Spring 2023

1
 What Is a Business Cycle?
 Burns and Mitchell (Measuring Business Cycles,
1946)
 Business cycles are a type of fluctuation found in the
aggregate economic activity of nations that organize their
work mainly in business enterprises: a cycle consists of
expansions occurring at about the same time in many
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recessions, contractions, and revivals which merge into
the expansion phase of the next cycle; this sequence of
changes is recurrent but not0
periodic; in duration business
cycles vary from more than one year to ten or twelve
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What Is a Business Cycle?
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What Is a Business Cycle?
 Recurrent, but not periodic
 Recurrent means the pattern of contraction–trough–
expansion–peak occurs again and again
 Not being periodic means that it doesn't occur at
regular, predictable intervals

 Persistent
 Declines are followed by further declines; growth is
followed by more growth
 Because of persistence, forecasting turning points is
quite important

4
Hong Kong’s Business Cycles
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5
Hong Kong’s Business Cycles from 1961
 Trough to trough:
 ? – 1966: banking troubles in 1964 and 1965, riots in 1966 and
1967
 1966 – 1974: trouble in the stock market and the first oil shock
of the global economy in 1974.
 1974 – 1982 (1985): banking crisis in 1982 and a currency
crisis in late 1983
 1982 (1985) – 1989: The Black Monday worldwide stock
market crash in 1987 and June 4th Incident in 1989
 1989 – 1998 (2001): Asian financial crisis in 1998
 1998 (2001) – 2009: financial crisis in 2007-8
 2009 - ：after the financial crisis

6
The Cyclical Behavior of Economic Variables:
Direction and Timing

 Direction
 Procyclical: in the same direction
 Countercyclical: in the opposite direction
 Acyclical: with no clear pattern

 Timing
 Leading: in advance
 Coincident: at the same time
 Lagging: after

7
Cyclical Behavior of Key Macroeconomic Variables
 Production

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Cyclical Behavior of Key Macroeconomic Variables

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Cyclical Behavior of Key Macroeconomic Variables
 Employment couiundenl Procyclical

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Cyclical Behavior of Key Macroeconomic Variables
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Cyclical Behavior of Key Macroeconomic Variables
 Average labor productivity and the real wage
Procyclical

Procyclical

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Cyclical Behavior of Key Macroeconomic Variables
 Money growth and inflation PlPTmexpusontimm
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Cyclical Behavior of Key Macroeconomic Variables
 Nominal interest rate
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Cyclical Behavior of Key Macroeconomic
Variables: A Summary
 Procyclical
 Coincident: industrial production, consumption, business
fixed investment, employment
 Leading: residential investment, inventory investment,
average labor productivity, money growth, stock prices
 Lagging: inflation, nominal interest rates
 Timing not designated: government purchases, real wage
 Countercyclical
 Timing not designated: unemployment
 Acyclical
 Timing not designated: real interest rates

15
Coincident and Leading Indexes
 Coincident indexes are designed to help figure out the
current state of the economy
 Leading indicators are designed to help predict peaks
and troughs

 The CFNAI is a coincident index produced by the

Federal Reserve Bank of Chicago based on 85
macroeconomic variables

16
Chicago Fed National Activity Index

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ADS Business Conditions Index

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Problems with the Leading Indicators
 Data are available promptly, but often revised later, so
the index may give misleading signals
 The index has given a number of false warnings
 The index provides little information on the timing of
the recession or its severity
 Structural changes in the economy necessitate periodic
revision of the index

19
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Seasonal Cycle and Business Cycle

 Some seasonal fluctuations are substantial and require
interventions by policy-makers

 Economists have attempted to study seasonal cycle on

the premise that similar variables are affecting both
business and seasonal cycles

 Should government intervention be used to smooth out

the business cycle?

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 What Explains Business Cycle Fluctuations?

 2 major components of business cycle theories

 A description of the shocks
 A model of how the economy responds to shocks 。政府客⼿
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21
 Aggregate Demand and Aggregate Supply:
A Brief Introduction
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 Aggregate demand curve
 Shows quantity of goods and services demanded (Y) for
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 Aggregate supply curve

 The aggregate supply curve shows how much output
producers are willing to supply at any given price level
 The short-run aggregate supply curve is 。horizontal;
prices are fixed in the short run
 The long-run aggregate supply curve is0 vertical at the
full-employment level of output
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22
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Aggregate Demand Shocks
 An aggregate demand shock is a change that shifts the
aggregate demand curve

24
Aggregate Demand Shocks

 How long does it take to get to the long run?

 Classical theory: prices adjust rapidly

 So recessions are short-lived
 No need for government intervention
 Keynesian theory: prices (and wages) adjust slowly
 Adjustment may take several years
 So the government can fight recessions by taking action
to shift the aggregate demand curve

25
Aggregate Supply Shocks
 Classicals view aggregate supply shocks as the main
cause of fluctuations in output
 An aggregate supply shock is a shift of the long-run
aggregate supply curve
 Factors that cause aggregate supply shocks are things
like changes in productivity or labor supply

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Aggregate Supply Shocks

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Readings
 Hong Kong’s Growth Synchronisation with China and the
U.S.: A Trend and Cycle Analysis
http://www.hkimr.org/uploads/publication/387/wp152004_summ
ary.pdf

 The Fed Funds Rate And The Business Cycle

http://www.nasdaq.com/article/the-fed-funds-rate-and-the-
business-cycle-cm512062

 COVID-19 to Plunge Global Economy into Worst

Recession since World War II
 https://www.worldbank.org/en/news/press-
release/2020/06/08/covid-19-to-plunge-global-economy-
into-worst-recession-since-world-war-ii

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