Lecture 5: Aggregate fluctuations

Before we can talk about the features of the business cycle, we have to define what it is. The first thing we need to do is to remove the trend. There are several distinct ways of doing that. The first is to take logs and look at differences, in other words to look at growth rates. This leads to very short cycles. Another is to take logs and remove a linear trend, in other words to look at percentage deviations from a geometric trend. This leads to very long cycles. A third, more flexible option is the Hodrick and Prescott (1980) filter. For simplicity, let’s stick with the percentage deviation from a geometric trend (or just the deviation of the log from a linear trend). Then the following facts stand out: 1. Consumption and investment and hours are positively correlated with output. 2. Consumption is less volatile than output 3. Investment is much more volatile than output 4. Hours worked are about as volatile as output 5. Output per hour worked is positively correlated with output itself. 6. Hours worked are uncorrelated with output per hour worked. If you want to verify these facts, and explore others, have a look at Canadian macro data