The Gross Domestic Product (GDP) is a procyclical and coincident economic indicator that is used to assess economic activity. Inflation is measured using the Implicit Price Deflator. Inflation is procyclical, rising during periods of economic strength and falling during periods of economic weakness. Inflation rates are also coincident indicators. Consumer expenditure and consumption are both procyclical and coincident.
Are prices countercyclical or procyclical?
Although money is procyclical, the price level is countercyclical, according to the international literature (Kydland and Prescottand Smith ). The fact that real monetary aggregates are more procyclical than nominal aggregates is consistent with this.
Is the unemployment rate pro- or anti-cyclical?
Countercyclical economic quantities, on the other hand, are those that are negatively associated with the overall situation of the economy. That is, ‘countercyclical’ quantities are those that tend to rise while the overall economy is slowing. An example of a countercyclical variable is unemployment. Business failures and stock market prices, on the other hand, are often countercyclical. In finance, a countercyclical asset is one that performs well when the economy as a whole is struggling. This could be a company or a financial instrument whose value is derived from the selling of a subpar product.
What does countercyclical monetary policy look like?
Fiscal policy that counteracts the impacts of the economic cycle is known as counter-cyclical fiscal policy. When the economy is sluggish, counter-cyclical fiscal policy initiatives can include increasing government spending or lowering taxes to help the economy recover.
What does procyclical mean?
What is the definition of procyclicality? Procyclicality, in its strictest sense, refers to the tendency of financial variables to move around a trend over the course of an economic cycle. Increased procyclicality simply indicates larger amplitude variations.
Is monetary policy cyclical in nature?
What about monetary policy, for example? Is there a historical pattern of procyclicality and recent graduation that we can see? 2
Figure 1 shows the cyclical components of the policy interest rate and real GDP by country. 1960-1999
For the period 1960-1999, Figure 1 depicts the relationship between (the cyclical components of) a policy (or short-term) interest rate and GDP.
3Industrial (developing) countries are indicated by black (yellow) bars. A positive correlation suggests countercyclical monetary policy (i.e., interest rates are raised in good times), whereas a negative correlation indicates procyclical monetary policy (i.e., interest rates are lowered in poor times) (i.e., interest rates are raised in bad times). The visual message is clear: every single industrial country has been countercyclical, as seen by the black bars on the picture’s left side. Procyclicality has been seen in 51% of emerging countries. In fact, compared to 0.38 percent for industrial countries, the average correlation for developing countries is -0.02 percent.
Figure 2: Country correlations between policy interest rate cyclical components and real GDP. 2000-2009
However, much like fiscal policy, many emerging markets have been able to avoid the procyclical trap over the last decade. Figure 2 is a replication of Figure 1 for the years 2000-2009 to demonstrate this. When compared to Figure 1, the visual image conveyed by Figure 2 is once again stunning. The number of yellow bars on the left-hand side of the image has increased dramatically. Countercyclical monetary policy is now used by almost 77 percent of developing nations, up from 49 percent in Figure 1.
What are the procyclical variables?
Important Points to Remember
- A positive correlation between the value of a good, a service, or an economic indicator and the general situation of the economy is referred to be procyclic.
- Gross domestic product (GDP), labor, and marginal cost are examples of procyclic economic metrics.
What is the difference between a procyclical economic variable and a countercyclical economic variable?
These are phrases that are used to describe how something affects the economy. Procyclical refers to something that has a positive effect, whilst countercyclical refers to something that has a negative effect. The phrases can also relate to a government’s attitude to taxation and spending.
Is unemployment a cyclical phenomenon?
When the economy is weak, businesses downsize their workers, and unemployment grows. In this sense, unemployment is countercyclical, rising when economic growth is low and falling when growth is high.