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Measuring Macroeconomic Fluctuations Notes

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Measuring Macroeconomic Fluctuations Summary

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

Macroeconomic Fluctuations

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

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

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

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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