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Ec210 Lent Term Course Notes

Economics Notes > Macroeconomic Principles Notes

This is an extract of our Ec210 Lent Term Course Notes document, which we sell as part of our Macroeconomic Principles Notes collection written by the top tier of LSE students.

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Measuring Macroeconomic Fluctuations Summary

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Macroeconomic Fluctuations Trends and Seasonality Volatility Co-Movement Leads and Lags Behaviour of Key Macroeconomic Variables

Macroeconomic Fluctuations

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Business Cycles = Fluctuations around the trend in real GDP Turning points in the deviations of real GDP from trend are peaks and troughs Booms = Persistent positive deviations from trend Recessions = Persistent negative deviations from trend

The Stylized Business Cycle
* Amplitude = Maximum deviation from trend (on average)
* Frequency = Number of cycles (on average) from peak to trough and back in a given amount of time
* Persistence = Proportion of deviation from trend expected to remain a given time from now Graph showing the stylized business cycle

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Trends and Seasonality

* If long-run growth rate is approx. constant then a linear trend line (with the variable in logarithms) is appropriate

* Long-run growth rates are not necessarily constant

De-trending
* Use Hodrick-Prescott (HP) filter to smooth out the trend line Example of a HP trend line

Course Notes Page 1

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Seasonality Adjustment
* Just because you have removed the trend does not mean that all remaining fluctuations are due to business cycles
* Examples of seasonality:
? Investment is low in winter owing to difficulty of carrying out construction work
? High money demand during the Christmas holiday
* Money supply contains a significant seasonal component
* Can remove seasonality by subtracting the average deviation from trend in each month or season Graph of data that has been seasonally adjusted

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Volatility

* Business cycles are not regular and do not follow a precise pattern
* They differ in amplitude and length

* However, there are relationships between economic variables over business cycles that do display some general patterns

Graph of percentage deviations from trend of real GDP

Course Notes Page 2

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