real business cycles - introduction to business cycles

Question 1

what is the standard defintion of a business cycle?

Answer 1

periodical upward and downward movement of economic activity

Question 2

what are the main features of the buissness cycle in the modern view?

Answer 2

-alternation of states ( up down)
-recurrence but no periodicity
-uneven distribution of fluctutations over the components of output
impulse propagtion mechanism ( cycles emerge as a response of an economy to exogenous shocks, detrended fluctuations )

Question 3

what are procyclical variables?

Answer 3

variables that move in the same direction ie show postive correlation as GDP are known as procyclical

Question 4

what are countercyclical variables?

Answer 4

variables that move in the opposite direction ie show negative correlation to GDP are known as countercyclical

Question 5

what are acyclical variables?

Answer 5

variables that display no clear pattern or no correlation to GDP are acyclical

Question 6

what are leading variables?

Answer 6

variables that move ahead of GDP are leading

Question 7

what are lagging variables?

Answer 7

variables that follow GDP are lagging

Question 8

what are coincident variables?

Answer 8

variables that move at the same time as GDP

Question 9

how can you distinguish a cycle from a trend in macro data?

Answer 9

suppose we observe a variable Xt from period t=1 until period t=T. define an artificial variable (X^)t and call it the trend in Xt
the trend should have the properties (1) it cannot be too far away from actual variable Xt and (2) it has to move smoothly ie the rate of growth in the trend should not change very much from one period to the next
after defining the trend, we can find the cyclical component (X~)t = Xt - (X^)t
so the cyclical component is the deviation of a variable from its trend usually expressed as a percentage of trend level

Question 10

what was lucas’ critique on large Keynesian macro econometric models without microfoundation?

Answer 10

he argues you cannot use these macroeconometric models for policy evaulation becuase the parameters are not policy invarient
economic agents would expect these parameters to change when the policy changes
behaviour of agents changes with the rules of the game and the models must allow for this

Question 11

what was lucas’ solution to his critique?

Answer 11

build models of individual behaviour starting from policy invarient primatives
which were the primitives of classical microeconomics ie preferences, technology and resource constraints

Question 12

what are rational expectations?

Answer 12

people know the correct probability distribution of stochastic economic variables

Question 13

does rational expectations imply rationaility?

Answer 13

no rational expectations does not imply rationality nor vice versa

Question 14

why use real for the real buissness cycles model?

Answer 14

because money plays no role in it

Question 15

what is the key idea of the RBC model?

Answer 15

random variations in productivity is a source of buissness cycles
changes in productivity drive investment, consumption and working hours

Question 16

how did the RBC models revolutionise the state of macroeconomics?

Answer 16

the unified framework for growth and buissness cycles based on the neoclassical model
recessions are not a disequillibrium phenomena (each stage of the buissness cycle is considered an equillibrium
purely supply side explanation of buissness cycles (technology/productivity shocks are central to aggregate fluctuations)
key propagation mechanism of productivity shocks ( intertemporal substitution of labour

Question 17

what is the quantitative assessment of the real business cycle?

Answer 17

step 1 : build a full version of the model
step 2 : set values for the parameters of the model based as much as possible on microeconomic data
step 3: do a growth accounting with the available date (as a rule quarterly) -> find the solow residual for each period needed. it is assumed that measured solow residuals are accurate measures of exogenous technological shocks
step 4: simulate how the model economy would respond to the types of technological shocks extracted in the previous step
step 5: measure the behaviour of key macro variables in the simulated model and compare it to the same measurements taken from the real economy
step 6 : if your simulated model does not mimic real data well (correlation is low) calibrate the model (step 2) until it matches the real data better