econ 202: macroeconomics i lecture 9 - business cycle...
TRANSCRIPT
ECON 202: Macroeconomics ILecture 9 - Business Cycle Facts and Introduction
John Grigsby
February 2, 2017
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 1 / 28
So far, we’ve been concerned with growth – long run trends
8.5
9
9.5
10
10.5
11
11.5Lo
g G
DP
per
Cap
ita
(Ch
ain
ed 2
00
9 U
SD)
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 2 / 28
Now we will study fluctuations around trend
What is a business cycle?
Business Cycles are a type of fluctuation found in the aggregate economic activityof nations that organize their work mainly in business enterprises. A cycle consistsof expansions occurring at about the same time in many economic activities,followed by similarly general recessions, contractions and revivals which mergeinto the expansion phase of the next cycle
Burns and Mitchell (1946)
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 3 / 28
What do business cycles look like?
P indicates peak, T shows trough. Taken fromhttp://www.fperri.net/TEACHING/bocconi/20205/LEC10.pdf
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 4 / 28
We see this in GDP growth rates
myf.red/g/cxNC
-15
-10
-5
0
5
10
15
20
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
fred.stlouisfed.orgSource:U.S.BureauofEconomicAnalysis
RealGrossDomesticProduct
PercentChangefrom
PrecedingPeriod
Long periods of positive growth followed by negative growth.
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 5 / 28
Observations regarding GDP cycle
myf.red/g/cxNC
-15
-10
-5
0
5
10
15
20
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
fred.stlouisfed.orgSource:U.S.BureauofEconomicAnalysis
RealGrossDomesticProduct
PercentChangefrom
PrecedingPeriod
1 Cycles recurrent but not periodic
2 Less volatile today than pre-80s.
3 Cycle length varies from 1.5 years to ≈ 20 years
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 6 / 28
Some key definitions (1)
Definition: Recession
A recession is defined as a period with 2+ consecutive quarters ofnegative growth in output (Okun).
NBER defines recussion to be recurring period of substantial declinein output, income, employment, and trade across a variety of sectors.See http://www.nber.org/cycles/main.html for more.
Definition: Cyclicality
A variable is said to be Pro-Cyclical, Counter-Cyclical, orA-cyclical if it moves together with, opposite to, or independently ofGDP, respectively.
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 7 / 28
Some key definitions (2)
Definition: Lags, Leads, and Coincidence
A variable is said to be Lagging, Leading, or Coincident if it movesafter, before, or at the same time as GDP, respectively.
Definition: Durable Goods
A good is durable if it is not meant for immediate consumption andmay be consumed over time. Non-durable goods are the opposite.
Durable examples: cars, household appliances; things that depreciateslowly
Non-durable examples: Food, Gasoline; things that depreciate quickly
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 8 / 28
Quiz: what do you think is pro-, counter-, and a-cyclical?
Direction TimingConsumption Pro-Cyclical CoincidentIndustrial Production Pro-Cyclical Coincident
Business Fixed Investment Pro-Cyclical CoincidentResidential Investment Pro-Cyclical LeadingInventories Pro-Cyclical Leading
Government Spending Pro-Cyclical VariesImports Pro-Cyclical LeadingExports Pro-Cyclical LaggingNet Exports Counter-Cyclical Leading
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 9 / 28
Quiz: what do you think is pro-, counter-, and a-cyclical?
Direction TimingConsumption Pro-Cyclical CoincidentIndustrial Production Pro-Cyclical Coincident
Business Fixed Investment Pro-Cyclical CoincidentResidential Investment Pro-Cyclical LeadingInventories Pro-Cyclical Leading
Government Spending Pro-Cyclical VariesImports Pro-Cyclical LeadingExports Pro-Cyclical LaggingNet Exports Counter-Cyclical Leading
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 9 / 28
Quiz: what do you think is pro-, counter-, and a-cyclical?
Direction TimingConsumption Pro-Cyclical CoincidentIndustrial Production Pro-Cyclical Coincident
Business Fixed Investment Pro-Cyclical CoincidentResidential Investment Pro-Cyclical LeadingInventories Pro-Cyclical Leading
Government Spending Pro-Cyclical VariesImports Pro-Cyclical LeadingExports Pro-Cyclical LaggingNet Exports Counter-Cyclical Leading
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 9 / 28
Quiz: what do you think is pro-, counter-, and a-cyclical?
Direction TimingConsumption Pro-Cyclical CoincidentIndustrial Production Pro-Cyclical Coincident
Business Fixed Investment Pro-Cyclical CoincidentResidential Investment Pro-Cyclical LeadingInventories Pro-Cyclical Leading
Government Spending Pro-Cyclical VariesImports Pro-Cyclical LeadingExports Pro-Cyclical LaggingNet Exports Counter-Cyclical Leading
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 9 / 28
Quiz: what do you think is pro-, counter-, and a-cyclical?
Direction TimingConsumption Pro-Cyclical CoincidentIndustrial Production Pro-Cyclical Coincident
Business Fixed Investment Pro-Cyclical CoincidentResidential Investment Pro-Cyclical LeadingInventories Pro-Cyclical Leading
Government Spending Pro-Cyclical VariesImports Pro-Cyclical LeadingExports Pro-Cyclical LaggingNet Exports Counter-Cyclical Leading
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 9 / 28
Round 2: Labor market, stock prices, inflation
Direction TimingEmployment Pro-Cyclical CoincidentUnemployment Rate Counter-Cyclical LaggingLabor Productivity Pro-Cyclical LeadingReal Wage Pro-Cyclical Varies
Money growth Pro-Cyclical LeadingInflation Pro-Cyclical Lagging
Stock prices Pro-Cyclical LeadingNominal Interest rates Pro-Cyclical LaggingReal interest rates Acyclical –
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 10 / 28
Round 2: Labor market, stock prices, inflation
Direction TimingEmployment Pro-Cyclical CoincidentUnemployment Rate Counter-Cyclical LaggingLabor Productivity Pro-Cyclical LeadingReal Wage Pro-Cyclical Varies
Money growth Pro-Cyclical LeadingInflation Pro-Cyclical Lagging
Stock prices Pro-Cyclical LeadingNominal Interest rates Pro-Cyclical LaggingReal interest rates Acyclical –
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 10 / 28
Round 2: Labor market, stock prices, inflation
Direction TimingEmployment Pro-Cyclical CoincidentUnemployment Rate Counter-Cyclical LaggingLabor Productivity Pro-Cyclical LeadingReal Wage Pro-Cyclical Varies
Money growth Pro-Cyclical LeadingInflation Pro-Cyclical Lagging
Stock prices Pro-Cyclical LeadingNominal Interest rates Pro-Cyclical LaggingReal interest rates Acyclical –
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 10 / 28
Round 2: Labor market, stock prices, inflation
Direction TimingEmployment Pro-Cyclical CoincidentUnemployment Rate Counter-Cyclical LaggingLabor Productivity Pro-Cyclical LeadingReal Wage Pro-Cyclical Varies
Money growth Pro-Cyclical LeadingInflation Pro-Cyclical Lagging
Stock prices Pro-Cyclical LeadingNominal Interest rates Pro-Cyclical LaggingReal interest rates Acyclical –
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 10 / 28
Round 2: Labor market, stock prices, inflation
Direction TimingEmployment Pro-Cyclical CoincidentUnemployment Rate Counter-Cyclical LaggingLabor Productivity Pro-Cyclical LeadingReal Wage Pro-Cyclical Varies
Money growth Pro-Cyclical LeadingInflation Pro-Cyclical Lagging
Stock prices Pro-Cyclical LeadingNominal Interest rates Pro-Cyclical LaggingReal interest rates Acyclical –
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 10 / 28
What is least cyclical? Non-Durable Consumption Growth
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012
Perc
ent
Ch
ange
Non-Durable Consumption not too volatile
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 11 / 28
Durable Consumption Much More Volatile
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012
Perc
ent
Ch
ange
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 12 / 28
And Residential Investment Even More Volatile
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012
Perc
ent
Ch
ange
Note that recessions are different: 2001 had small drop in residentialinvestment, but 2008 had a huge drop.
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 13 / 28
While Non-Residential Investment Also Volatile
-10.0
-5.0
0.0
5.0
10.0
15.0
1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012
Perc
ent
Ch
ange
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 14 / 28
To Summarize (All Series Detrended by HP Filter)
Source: http://www3.nd.edu/~esims1/stylized_facts.pdf
Investment 2.76 times as volatile as GDP
Hours worked, consumption, investment, and TFP very cyclical
All variables above highly persistent
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 15 / 28
Lower Income Countries more Volatile
Source: http://www.fperri.net/TEACHING/bocconi/20205/LEC10.pdf
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 16 / 28
Causes and Consequences of Country Differences
Why?
Still under debate
Institutions/Corruption/Conflict?
Climate? (What is economic cost of global warming?)
Less ability to save and smooth?
More commodity-driven/less diversified economy, so more subject tosector-specific global shocks (Thanks Michael!)
Consequences
Poor individuals less able to save
⇒ If bad shock hits, no way to consumption smooth
⇒ May lead to abject poverty
⇒ Which in turn can lead to populist governments and bad politics
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 17 / 28
Major Questions of Business Cycle Theory
1 What causes business cycles?
Is it persistent shocks?Or is it from our response to temporary shocks?
2 Why do different goods categories have different responses?
3 What kinds of policies can smooth cycles?
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 18 / 28
A brief note on prediction
Economists at policy institutions and banks often try to predict onset ofbusiness cycles with leading indicators
Logic
If falls in labor productivity always preceed falls in output, we can predictthat output will fall, say, 2 quarters after an observed drop in laborproductivity.
Common leading indicators include
1 Weekly hours
2 Initial claims for unemployment insurance
3 Manufacturer new orders
4 Housing permits/starts
5 Index of Consumer Expectations
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 19 / 28
A brief note on prediction
Economists at policy institutions and banks often try to predict onset ofbusiness cycles with leading indicators
Logic
If falls in labor productivity always preceed falls in output, we can predictthat output will fall, say, 2 quarters after an observed drop in laborproductivity.
Common leading indicators include
1 Weekly hours
2 Initial claims for unemployment insurance
3 Manufacturer new orders
4 Housing permits/starts
5 Index of Consumer Expectations
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 19 / 28
A word of caution
Lucas Critique
Without knowing the underlying mechanisms behind these statisticalrelationships, subject to mistakes if rules of the game change.
For example, residential investment fell a lot in 2008, but did not in 2001.
We need theory of business cycles
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 20 / 28
The predictive power of the yield curve
-4.00
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013
Spre
ad b
etw
een
10
yea
r an
d 1
yea
r Tr
easu
ry Y
ield
s
“Yield on t-year Treasury Bond” means interest rate demanded to lend $1to the government for t years
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 21 / 28
Why might the yield curve be predictive?
Let iLt be the interest rate (yield) on a 10-year treasury in period t, andlet iSt be the yield on a 1-year treasury in period t. Then
iLT ≈1
10iSt +
1
10Et [iSt+1] + . . .+ Et [iSt+10]
Why? If iLt were much larger than the above, then should buy long-termbond and sell short-term bond because get higher return for it(no-arbitrage).
Suppose that above holds and iLt >> iSt . Then
Investors must expect future rates to be higher.
Rates tend to be higher in good times because Fed raises rates tocool inflation (more on this later/in ECON 203)
So must expect good times in future.
But if reverse is true iLt < iSt , then expect bad times in future. This iscalled an “inverted yield curve”
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 22 / 28
Why might the yield curve be predictive?
Let iLt be the interest rate (yield) on a 10-year treasury in period t, andlet iSt be the yield on a 1-year treasury in period t. Then
iLT ≈1
10iSt +
1
10Et [iSt+1] + . . .+ Et [iSt+10]
Why? If iLt were much larger than the above, then should buy long-termbond and sell short-term bond because get higher return for it(no-arbitrage).
Suppose that above holds and iLt >> iSt . Then
Investors must expect future rates to be higher.
Rates tend to be higher in good times because Fed raises rates tocool inflation (more on this later/in ECON 203)
So must expect good times in future.
But if reverse is true iLt < iSt , then expect bad times in future. This iscalled an “inverted yield curve”
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 22 / 28
How to think about differences in Cyclicalilty?
Differences in Income Elasticities
Definition: Engel curves
An Engel curve plots the amount consumed of a product as you increaseincome
0
0.5
1
1.5
2
2.5
3
3.5
1 2 3 4 5
Co
nsu
mp
tio
n o
n G
oo
d T
ype
i
Income
Engel Curves by Consumption Type
Non-Durable Goods Durable Goods
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 23 / 28
Income Elasticities and Business Cycle Volatility
Definition: Income Elasticity
A good i ’s income elasticity is defined to be the percent change inconsumption of i for a 1 percent change in income. That is
ηi =%∆xi%∆Y
1 Suppose that output falls so that we become poorer2 The amount that consumption of goods fall depends on the good’s
income elasticity3 More income elastic goods fall more4 Non-durable consumption tends to be a necessity (ηi < 1): we always
need to eat.5 Durable consumption may be a luxury (ηi > 1): we can put off
purchasing a new car
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 24 / 28
Transmission Mechanisms
Income elasticity explanation is nice, but inconsistent with permanentincome hypothesis.
⇒ Why wouldn’t we just consumption smooth if shocks truly temporary?
Need mechanism to make temporary shock permanent. Possibilities
1 Pass-through to investment (Real Business Cycle Theory)2 Financial constraints: shocks require deleveraging3 Adjustment costs force large drops in anticipation of future shocks4 Businesses/workers do not enter during recessions ⇒ missing
generation of ideas/human capital growth
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 25 / 28
Transmission Mechanisms
Income elasticity explanation is nice, but inconsistent with permanentincome hypothesis.
⇒ Why wouldn’t we just consumption smooth if shocks truly temporary?
Need mechanism to make temporary shock permanent. Possibilities
1 Pass-through to investment (Real Business Cycle Theory)2 Financial constraints: shocks require deleveraging3 Adjustment costs force large drops in anticipation of future shocks4 Businesses/workers do not enter during recessions ⇒ missing
generation of ideas/human capital growth
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 25 / 28
Unemployment Rate Clearly Pro-Cyclical
0
2
4
6
8
10
12
1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012
Un
emp
loym
en
t R
ate
(%)
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 26 / 28
Real Business Cycle (RBC) in words
Developed by Kydland and Prescott (1982) [won them the Nobel Prize]
1 There is a temporary fundamental shock in period 0 (e.g. productivityshock)
2 Return to working is lower, so households supply less labor
3 That reduces income in the economy by more than if productivityshock were only change
4 Smaller pie today + consumption smoothing ⇒ less capitalacquisition
5 End up with smaller capital stock in period 1, so lessoutput/consumption in period 1
6 Thus temporary shock spills over into future periods
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 27 / 28
Real Business Cycle (RBC) in words
Developed by Kydland and Prescott (1982) [won them the Nobel Prize]
1 There is a temporary fundamental shock in period 0 (e.g. productivityshock)
2 Return to working is lower, so households supply less labor
3 That reduces income in the economy by more than if productivityshock were only change
4 Smaller pie today + consumption smoothing ⇒ less capitalacquisition
5 End up with smaller capital stock in period 1, so lessoutput/consumption in period 1
6 Thus temporary shock spills over into future periods
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 27 / 28
Real Business Cycle (RBC) in words
Developed by Kydland and Prescott (1982) [won them the Nobel Prize]
1 There is a temporary fundamental shock in period 0 (e.g. productivityshock)
2 Return to working is lower, so households supply less labor
3 That reduces income in the economy by more than if productivityshock were only change
4 Smaller pie today + consumption smoothing ⇒ less capitalacquisition
5 End up with smaller capital stock in period 1, so lessoutput/consumption in period 1
6 Thus temporary shock spills over into future periods
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 27 / 28
Real Business Cycle (RBC) in words
Developed by Kydland and Prescott (1982) [won them the Nobel Prize]
1 There is a temporary fundamental shock in period 0 (e.g. productivityshock)
2 Return to working is lower, so households supply less labor
3 That reduces income in the economy by more than if productivityshock were only change
4 Smaller pie today + consumption smoothing ⇒ less capitalacquisition
5 End up with smaller capital stock in period 1, so lessoutput/consumption in period 1
6 Thus temporary shock spills over into future periods
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 27 / 28
Real Business Cycle (RBC) in words
Developed by Kydland and Prescott (1982) [won them the Nobel Prize]
1 There is a temporary fundamental shock in period 0 (e.g. productivityshock)
2 Return to working is lower, so households supply less labor
3 That reduces income in the economy by more than if productivityshock were only change
4 Smaller pie today + consumption smoothing ⇒ less capitalacquisition
5 End up with smaller capital stock in period 1, so lessoutput/consumption in period 1
6 Thus temporary shock spills over into future periods
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 27 / 28
Real Business Cycle (RBC) in words
Developed by Kydland and Prescott (1982) [won them the Nobel Prize]
1 There is a temporary fundamental shock in period 0 (e.g. productivityshock)
2 Return to working is lower, so households supply less labor
3 That reduces income in the economy by more than if productivityshock were only change
4 Smaller pie today + consumption smoothing ⇒ less capitalacquisition
5 End up with smaller capital stock in period 1, so lessoutput/consumption in period 1
6 Thus temporary shock spills over into future periods
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 27 / 28
Short-Run Productivity Shocks: What are they?
Much of our theory revolves around a production function of the form
Y = AF (K , L)
so that output Y is a function of capital K and labor L, multiplied bya productivity parameter A
Easy to think about long run growth in A from technology/education
But what could be an exogenous temporary downward shock in A?
1 Weather (particularly for agriculture)2 Adjustments to new technology requires learning3 “Forgetting” how to do something (maybe from firm exit/retirement)4 Wartime destruction5 Strikes6 Shifts in regulation/laws/institutions7 Infrastructure depreciation
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 28 / 28
Short-Run Productivity Shocks: What are they?
Much of our theory revolves around a production function of the form
Y = AF (K , L)
so that output Y is a function of capital K and labor L, multiplied bya productivity parameter A
Easy to think about long run growth in A from technology/education
But what could be an exogenous temporary downward shock in A?1 Weather (particularly for agriculture)
2 Adjustments to new technology requires learning3 “Forgetting” how to do something (maybe from firm exit/retirement)4 Wartime destruction5 Strikes6 Shifts in regulation/laws/institutions7 Infrastructure depreciation
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 28 / 28
Short-Run Productivity Shocks: What are they?
Much of our theory revolves around a production function of the form
Y = AF (K , L)
so that output Y is a function of capital K and labor L, multiplied bya productivity parameter A
Easy to think about long run growth in A from technology/education
But what could be an exogenous temporary downward shock in A?1 Weather (particularly for agriculture)2 Adjustments to new technology requires learning
3 “Forgetting” how to do something (maybe from firm exit/retirement)4 Wartime destruction5 Strikes6 Shifts in regulation/laws/institutions7 Infrastructure depreciation
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 28 / 28
Short-Run Productivity Shocks: What are they?
Much of our theory revolves around a production function of the form
Y = AF (K , L)
so that output Y is a function of capital K and labor L, multiplied bya productivity parameter A
Easy to think about long run growth in A from technology/education
But what could be an exogenous temporary downward shock in A?1 Weather (particularly for agriculture)2 Adjustments to new technology requires learning3 “Forgetting” how to do something (maybe from firm exit/retirement)
4 Wartime destruction5 Strikes6 Shifts in regulation/laws/institutions7 Infrastructure depreciation
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 28 / 28
Short-Run Productivity Shocks: What are they?
Much of our theory revolves around a production function of the form
Y = AF (K , L)
so that output Y is a function of capital K and labor L, multiplied bya productivity parameter A
Easy to think about long run growth in A from technology/education
But what could be an exogenous temporary downward shock in A?1 Weather (particularly for agriculture)2 Adjustments to new technology requires learning3 “Forgetting” how to do something (maybe from firm exit/retirement)4 Wartime destruction
5 Strikes6 Shifts in regulation/laws/institutions7 Infrastructure depreciation
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 28 / 28
Short-Run Productivity Shocks: What are they?
Much of our theory revolves around a production function of the form
Y = AF (K , L)
so that output Y is a function of capital K and labor L, multiplied bya productivity parameter A
Easy to think about long run growth in A from technology/education
But what could be an exogenous temporary downward shock in A?1 Weather (particularly for agriculture)2 Adjustments to new technology requires learning3 “Forgetting” how to do something (maybe from firm exit/retirement)4 Wartime destruction5 Strikes
6 Shifts in regulation/laws/institutions7 Infrastructure depreciation
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 28 / 28
Short-Run Productivity Shocks: What are they?
Much of our theory revolves around a production function of the form
Y = AF (K , L)
so that output Y is a function of capital K and labor L, multiplied bya productivity parameter A
Easy to think about long run growth in A from technology/education
But what could be an exogenous temporary downward shock in A?1 Weather (particularly for agriculture)2 Adjustments to new technology requires learning3 “Forgetting” how to do something (maybe from firm exit/retirement)4 Wartime destruction5 Strikes6 Shifts in regulation/laws/institutions
7 Infrastructure depreciation
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 28 / 28
Short-Run Productivity Shocks: What are they?
Much of our theory revolves around a production function of the form
Y = AF (K , L)
so that output Y is a function of capital K and labor L, multiplied bya productivity parameter A
Easy to think about long run growth in A from technology/education
But what could be an exogenous temporary downward shock in A?1 Weather (particularly for agriculture)2 Adjustments to new technology requires learning3 “Forgetting” how to do something (maybe from firm exit/retirement)4 Wartime destruction5 Strikes6 Shifts in regulation/laws/institutions7 Infrastructure depreciation
Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 28 / 28