Procyclical and countercyclical variables are variables that fluctuate in a way that is positively or negatively correlated with

business cycle Business cycles are intervals of expansion followed by recession in economic activity. These changes have implications for the welfare of the broad population as well as for private institutions. Typically business cycles are measured by examin ...

fluctuations in

gross domestic product Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is of ...

(GDP). The scope of the concept may differ between the context of

macroeconomic Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole. For example, using interest rates, taxes, an ...

theory and that of

economic policy The economy of governments covers the systems for setting levels of taxation, government budgets, the money supply and interest rates as well as the labour market, national ownership, and many other areas of government interventions into the ec ...

–making. The concept is often encountered in the context of a government's approach to spending and taxation. A 'procyclical fiscal policy' can be summarised simply as governments choosing to increase

government spending Government spending or expenditure includes all government consumption, investment, and transfer payments. In national income accounting, the acquisition by governments of goods and services for current use, to directly satisfy the individual ...

and reduce

taxes A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, o ...

during an

economic expansion An economic expansion is an increase in the level of economic activity, and of the goods and services available. It is a period of economic growth as measured by a rise in real GDP. The explanation of fluctuations in aggregate economic activit ...

, but reduce spending and increase taxes during a

recession In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various ...

. A 'countercyclical' fiscal policy takes the opposite approach: reducing spending and raising taxes during a boom period, and increasing spending and cutting taxes during a

Business cycle theory

Procyclical

In business cycle theory and finance, any economic quantity that is positively

correlated In statistics, correlation or dependence is any statistical relationship, whether causal or not, between two random variables or bivariate data. Although in the broadest sense, "correlation" may indicate any type of association, in statistic ...

with the overall state of the

economy An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with th ...

is said to be procyclical. That is, any quantity that tends to increase in expansion and tend to decrease in a recession is classified as procyclical.

Gross Domestic Product Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is of ...

(GDP) is an example of a procyclical economic indicator. Many stock prices are also procyclical because they tend to increase when the economy is growing quickly.

Countercyclical

Conversely, any economic quantity that is negatively

with the overall state of the

is said to be countercyclical. That is, quantities that tend to increase when the overall economy is slowing down are classified as 'countercyclical'.

Unemployment Unemployment, according to the OECD (Organisation for Economic Co-operation and Development), is people above a specified age (usually 15) not being in paid employment or self-employment but currently available for work during the refe ...

is an example of a countercyclical variable. Similarly, business failures and stock market prices tend to be countercyclical. In finance, an asset that tends to do well while the economy as a whole is doing poorly is referred to as countercyclical, and could be for example a business or a financial instrument whose value is derived from sales of an

inferior good In economics, an inferior good is a good whose demand decreases when consumer income rises (or demand increases when consumer income decreases), unlike normal goods, for which the opposite is observed. Normal goods are those goods for which the ...

Economic policy making

Procyclical

Procyclical has a different meaning in the context of economic policy. In this context, it refers to any aspect of economic policy that could magnify economic or financial fluctuations. Of course, since the effects of particular policies are often uncertain or disputed, a policy will be often procyclical, countercyclical or acyclical according to the view of the one judging it. Thus, the financial regulations of the

Basel II Accord Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. It is now extended and partially superseded by Basel III. The Basel II Accord was publis ...

have been criticized for their possible procyclicality. The accord requires banks to increase their capital ratios when they face greater risks. Unfortunately, this may require them to lend less during a

or a

credit crunch A credit crunch (also known as a credit squeeze, credit tightening or credit crisis) is a sudden reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from banks. A credit cr ...

, which could aggravate the downturn. A similar criticism has been directed at

fair value In accounting and in most schools of economic thought, fair value is a rational and unbiased estimate of the potential market price of a good, service, or asset. The derivation takes into account such objective factors as the costs associated wi ...

accounting rules. The effect of the single Eurozone interest rate on the relatively high-inflation countries in the Eurozone periphery is also pro-cyclical, leading to very low or even negative real interest rates during an upturn which magnifies the boom (e.g. 'Celtic Tiger' upturn in Ireland) and property and asset price bubbles whose subsequent bust magnifies the downturns.

Countercyclical

Conversely, an economic or financial policy is called countercyclical if it works against the

cyclical Cycle, cycles, or cyclic may refer to: Anthropology and social sciences * Cyclic history, a theory of history * Cyclical theory, a theory of American political history associated with Arthur Schlesinger, Sr. * Social cycle, various cycles in soc ...

tendencies in the economy. That is, countercyclical policies are ones that cool down the economy when it is in an upswing, and stimulate the economy when it is in a downturn.

Keynesian economics Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output ...

advocates the use of automatic and discretionary countercyclical policies to lessen the impact of the

. One example of an automatically countercyclical

fiscal policy In economics and political science, fiscal policy is the use of government revenue collection ( taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variabl ...

progressive taxation A progressive tax is a tax in which the tax rate increases as the taxable amount increases.Sommerfeld, Ray M., Silvia A. Madeo, Kenneth E. Anderson, Betty R. Jackson (1992), ''Concepts of Taxation'', Dryden Press: Fort Worth, TX The term ''progr ...

. By taxing a larger proportion of income when the economy expands, a progressive tax tends to decrease demand when the economy is booming, thus reining in the boom. Other schools of economic thought, such as

new classical macroeconomics New classical macroeconomics, sometimes simply called new classical economics, is a school of thought in macroeconomics that builds its analysis entirely on a neoclassical framework. Specifically, it emphasizes the importance of rigorous foundat ...

, hold that countercyclical policies may be counterproductive or destabilizing, and therefore favor a

laissez-faire ''Laissez-faire'' ( ; from french: laissez faire , ) is an economic system in which transactions between private groups of people are free from any form of economic interventionism (such as subsidies) deriving from special interest groups ...

fiscal policy as a better method for maintaining an overall robust economy. When the government adopts a countercyclical fiscal policy in response to a threat of recession the government might increase infrastructure spending.

References

{{reflist Business cycle de:Prozyklische Wirtschaftspolitik

Business cycle theory

Procyclical

Countercyclical

Economic policy making

Procyclical

Countercyclical

See also

References