Procyclical

Procyclical

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.

Meaning in business cycle theory

In business cycle theory and finance, any economic quantity that is positively correlated with the overall state of the economy is said to be 'procyclical'. [Procyclic [http://www.investopedia.com/terms/p/procyclical.asp Investopedia] Retrieved on 27 December, 2007] 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.

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 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. [Gordy MB and Howells B (2004), [http://www.bis.org/bcbs/events/rtf04gordy_howells.pdf 'Procyclicality in Basel II: can we treat the disease without killing the patient?'] ] A similar criticism has been directed at fair value accounting rules. [' [http://www.economist.com/finance/displaystory.cfm?story_id=12274096 All's fair: the crisis and fair-value accounting'] , "The Economist", Sept. 20, 2008.]

ee also

* Countercyclical
* Business cycle

References


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