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The expansion can be divided between recovery and prosperity.

The recession may be divided between contraction (or crisis) and depression (term used only for very serious recessions). The cycle is reflected in the emergence of positive output gaps followed by negative output gaps. Positive gaps occur when the output is above the level of its trajectory trend.

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Although recurrent, economic cycles come and go with varying amplitudes and duration. The duration of the cycles have varied over a year up to 10-12 years.Phases of the Business Cycle – The Role of Impulse and Propagation The impulse, or initial shock causing a recession (or expansion), may be due to a large variety of reasons, as will be shown shortly. However, once the downturn (or the upturn) is under way, a recurring pattern of economic reactions generally occur. Thus even if the impulse is quite different, the propagation – as the downturn (or the up-turn) spreads through the economy – is usually quite similar.

8 Phases of the Business Cycle The lower turning point is called throughThe upper turning point is called peak. 9 Cyclical Nature The reference variable to indicate the cyclical position of an economy is GAP (although cycles can occur in a very broad range of economic variables). The cyclical nature of a macroeconomic variable is assessed by the correlation coefficient between the cyclical component of this variable and the GAP cycle. This coefficient varies between -1 and 1. If it is significantly positive (negative) we say that the variable is pro-cyclical (counter- cyclical).

If it is approximately zero is a-cyclical. 10Degree of Cyclical Synchronization of a Variable with the GAP Cycle When a variable pro-cyclical or counter-cyclical presents correlation coefficients with GAP higher (in absolute value) when taking their values one or more periods (not many) previous to the time series of GAP, we define it as a leading variable. Otherwise it is said lagging.

Value) when taking their contemporary values (the same period) on the time series of GAP, we define it as a coincident variable. 11 The actual starting and ending dates of each business cycle are based on the behavior of he leading, coincident, and lagging variables. 2 Leading Indicators Leading indicators consists of economic data series that usually turn up or down several months before general economic conditions change.

The major problem with these variables is that it provides too many false signals, indicating that a recession is imminent when in fact no turning point is about to occur. Examples of leading indicators include the stock MM money supply, index of consumer expectations, Yield spread between 10 year Treasury note yield and the central bank funds rate. 13Coincident Indicators These variables measures where the economy is right now. It consists of four components: payroll employment, real business sales, industrial production, and real personal income excluding transfer payments. Although not widely followed, this is a very useful index for pinpointing where the economy is right now. It is more accurate than real GAP, because usually these variables are measured on a monthly basis.

14 Lagging Indicators This index is supposed to provide verification that the economy has in fact entered a recession or recovery.

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