Business Cycles and

Global Economy
MSL782

Session 2: What is business cycles?

Announcement
• 18th Feb – Saturday not 22nd Feb
• Assessment modified  Agreed in the class
• Group allocation  Finalising
• Confirm topics  Agreed
• Materials will be distributed via Moodle
• Emailing list  Contact Zeeshan
• Next session – Quiz 1
 Topic and schedule
1 4th Jan Introduction to the class
Stylised facts and definition Type of cycles
2 11th Jan Recap of basic economics
Stylised facts and definition
3 18th Jan Equities Profit, growth Quiz 1
Identification of cycles
22nd Jan Minor exam
4 25th Jan Bonds Interest rates, financial cycles
Long cycles
5 1st Feb Commodities Commodity cycles
Economic structure and cycles
6 15th Feb Exchange rates Synchronisation Quiz 2
Economic indicators Forecasting
7 18th Feb Presentation
26 Feb Major exam
 To be discussed once again

Assessment in the next class

• Evaluation components
· Attendance – 5%
· Quiz (twice) – 20% (10% each)
· Group presentation and reflection piece – (10%
+10%)
· Minor exam – 20%
· Major exam – 35%
• Details will follow and we inform you in due course
Today’s topic
• Overall understanding of the business cycles
• Recap of basic macro- and micro- economics
Questions to address
• Does cycles exist? – debate
• What is business cycles? - cycle/fluctuation
• How does it look like? – nature of cycle: duration,
peak, trough, amplitude
• Why is there a cycle? – exogenous vs endogenous
• What can we do about it? – policy and business
strategies
Phenomena
US GDP and recessions
India as a global power?
Historical global recession
Cyclical fluctuations in profits of
S&P 500 companies
Business cycles
• Expansion followed by contraction in economic
activities and vice versa
Nature of cycles

Amplitude

Duration
Upswing
• Rate of Profit falls
• Output expands and unemployment falls
• Inflation rises towards the end of the phase, driven
by costs
• Property prices rise
• Money market interest rate rise, bond rates fall
before the end of the phase
• Equity market gets hit towards the end of the phase
Downswing
• Output contracts
• Inflation falls after an initial rise and commodity
prices fall
• Property prices fall
• Monetary and bond rates fall, but bond rates rise
before the end of the phase
• Unemployment rises and wages fall
• Equity market rises strongly towards the end of the
phase
• Rate of profit is restored
Contested views
• Fluctuation/Deviation from trend – Mainstream
• Exogenously driven
• Random shocks are transmitted to the domestic
economy
• Recurrent cycles – Heterodox
• Endogenously driven
• Profit, demand, etc.
Types of Cycles
Cycle Duration Source

K-Wave/Long 50-60 yrs Major innovations

cycles

Kuznets 15-20 yrs Infrastructure investments

Juglar 7-11 yrs Fixed capital investments

Kitchin 3-4 yrs Inventory capital changes

Long cycles
Duratio
Hegemonic
Trough Peak Trough n Technology
Power
(years)

1790 1814 1848 58 Britain Canals

Railways, Steam (steam

1848 1872 1893 45 Britain
engine)

Steel, Combustion engine,

1893 1917 1940 47 Britain Electricity, Chemicals,
Telephone

Electronics, Plastics,
1940 1975 2009 60 United States
Aerospace, Nuclear energy

Internet, Biotechnology,
2018/9? 2040 2065 <50 China/E.Asia
Robotics

Source: Goldstein (1988)

Long and short cycles
Policies
Fiscal and monetarypolicies
• Counter-cyclical policy
• Upswing - Fiscal: Reduce spending, increase tax,
Financial: Increase interest rates, contract credit
• Downswing – Fiscal: increase spending, reduce tax,
Financial: Reduce interest rates, expand credit
• Pro-cyclical policy
• Upswing - Fiscal: increase spending, reduce tax,
Financial: Reduce interest rates, expand credit
• Downswing – Fiscal: Reduce spending, increase tax,
Financial: Increase interest rates, contract credit
• A-cyclical policy