Procyclical
Encyclopedia
Procyclical is a term used in economics to describe how an economic quantity is related to economic fluctuations. It is the opposite of countercyclical
. However, it has more than one meaning.
with the overall state of the economy
is said to be procyclical. That is, any quantity that tends to increase when the overall economy is growing is classified as procyclical. Quantities that tend to increase when the overall economy is slowing down are classified as 'countercyclical'.
Gross Domestic Product
(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. Unemployment
is an example of a countercyclical economic indicator.
In particular, the financial regulations of the Basel II Accord 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 recession
or a credit crunch
, which could aggravate the downturn. A similar criticism has been directed at fair value
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
Countercyclical is a term used in economics to describe how an economic quantity is related to economic fluctuations. It is the opposite of procyclical. However, it has more than one meaning.-Meaning in policy making:...
. However, it has more than one meaning.
Meaning in business cycle theory
In business cycle theory and finance, any economic quantity that is positively correlatedCorrelation
In statistics, dependence refers to any statistical relationship between two random variables or two sets of data. Correlation refers to any of a broad class of statistical relationships involving dependence....
with the overall state of the economy
Economy
An economy consists of the economic system of a country or other area; the labor, capital and land resources; and the manufacturing, trade, distribution, and consumption of goods and services of that area...
is said to be procyclical. That is, any quantity that tends to increase when the overall economy is growing is classified as procyclical. Quantities that tend to increase when the overall economy is slowing down are classified as 'countercyclical'.
Gross Domestic Product
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
(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. Unemployment
Unemployment
Unemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...
is an example of a countercyclical economic indicator.
Meaning in policy making
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. An economic policy that is believed to decrease fluctuations is called countercyclical.In particular, the financial regulations of the Basel II Accord have been criticized for their possible procyclicality. The accord requires banks to increase their capital ratios
Capital adequacy ratio
Capital adequacy ratio , also called Capital to Risk Assets Ratio , is a ratio of a bank's capital to its risk...
when they face greater risks. Unfortunately, this may require them to lend less during a recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
or a credit crunch
Credit crunch
A credit crunch is a reduction in the general availability of loans or a sudden tightening of the conditions required to obtain a loan from the banks. A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates...
, which could aggravate the downturn. A similar criticism has been directed at fair value
Fair value
Fair value, also called fair price , is a concept used in accounting and economics, defined as a rational and unbiased estimate of the potential market price of a good, service, or asset, taking into account such objective factors as:* acquisition/production/distribution costs, replacement costs,...
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.