Business Cycle – Definition

Cite this article as:"Business Cycle – Definition," in The Business Professor, updated September 17, 2019, last accessed October 22, 2020,


Business Cycle Definition

The business cycle signifies variations in the production of goods and services in a nation. These business cycles are usually determined as per the increase and decrease in real gross domestic product or adjustments made in GDP for inflation.

Business cycle and market cycle are different in nature. The business cycle is determined using indices of the stock market. Debt cycle, which is a term different from the business cycle, is the increase and decrease in privately and publicly held debt.

The business cycle is also referred to as the economic cycle, or trade cycle.

A Little More on What is a Business Cycle

Business cycles refer to variations experienced by an economy over a certain time period. The real-time variations in real gross domestic product are totally inconsistent. These variations involve output from all industries like households, governments, not-for-profit organizations, and organizational results. Output cycle offers a more effective detail of what is to be considered for making calculations.

The business cycle involves two stages of contraction and expansion. In the expansion stage, the economic growth is more, and during the contraction stage (also known as recession), there is a reduction seen in the economic growth.

Post the great World War II, the expansion or growth of the economy was translated in the form of increasing population, urbanization, and more consumer spending. Gradually, growth was the result of debt that people took in the form of credit cards, industrial mortgages, loans, in contrast to equity funding, speculations made by the dotcom followed by more debt.

Reference for ‚ÄúBusiness Cycle‚ÄĚ ‚Äļ Investing ‚Äļ US Economy ‚Äļ Economic Theory ‚Äļ Resources ‚Äļ Knowledge ‚Äļ Economics…/market-and-economic…/business-cycle-update-nov-2018

Academic research on ‚ÄúBusiness Cycle‚ÄĚ

The political business cycle, Nordhaus, W. D. (1975). The political business cycle. The review of economic studies, 42(2), 169-190.

The financial accelerator in a quantitative¬†business cycle¬†framework, Bernanke, B. S., Gertler, M., & Gilchrist, S. (1999). The financial accelerator in a quantitative business cycle framework.¬†Handbook of macroeconomics,¬†1, 1341-1393. This chapter develops a dynamic general equilibrium model that is intended to help clarify the role of credit market frictions in business fluctuations, from both a qualitative and a quantitative standpoint. The model is a synthesis of the leading approaches in the literature. In particular, the framework exhibits a ‚Äúfinancial accelerator‚ÄĚ, in that endogenous developments in credit markets work to amplify and propagate shocks to the macroeconomy. In addition, we add several features to the model that are designed to enhance the empirical relevance. First, we incorporate money and price stickiness, which allows us to study how credit market frictions may influence the transmission of monetary policy. In addition, we allow for lags in investment which enables the model to generate both hump-shaped output dynamics and a lead-lag relation between asset prices and investment, as is consistent with the data. Finally, we allow for heterogeneity among firms to capture the fact that borrowers have differential access to capital markets. Under reasonable parametrizations of the model, the financial accelerator has a significant influence on business cycle dynamics.

A perspective on modern business cycle theory,Kiyotaki, N. (2011). A perspective on modern business cycle theory. FRB Richmond Economic Quarterly, 97(3), 195-208. In this article I provide a perspective on the current state of modern business cycle theory. This theory has developed from an application of the Arrow-Debreu general equilibrium framework to the neoclassical growth model. On the positive side, this approach is able to accommodate various sources of heterogeneity in preferences and production within its complete markets framework. On the negative side, this approach has to rely on persistent exogenous shocks to account for business cycles since its internal propagation mechanism is weak. I discuss the implications of three important extensions of the basic framework. The first two extensions, noncompetitive pricing and frictional labor markets, do not overcome the basic weakness of limited propagation. The third extension, limited insurance and exogenous credit constraints, shows promise to account for the amplification and propagation of exogenous shocks.

Monetary cycles, financial cycles and the business cycle, Adrian, T., Estrella, A., & Shin, H. S. (2010). Monetary cycles, financial cycles and the business cycle. FRB of New York Staff Report, (421). One of the most robust stylized facts in macroeconomics is the forecasting power of the term spread for future real activity. The economic rationale for this forecasting power usually appeals to expectations of future interest rates, which affect the slope of the term structure. In this paper, we propose a possible causal mechanism for the forecasting power of the term spread, deriving from the balance sheet management of financial intermediaries. When monetary tightening is associated with a flattening of the term spread, it reduces net interest margin, which in turn makes lending less profitable, leading to a contraction in the supply of credit. We provide empirical support for this hypothesis, thereby linking monetary cycles, financial cycles, and the business cycle.

Indivisible labor and the¬†business cycle, Hansen, G. D. (1985). Indivisible labor and the business cycle.¬†Journal of monetary Economics,¬†16(3), 309-327. A growth model with shocks to technology is studied. Labor is indivisible, so all variability in hours worked is due to fluctuations in the number employed. We find that, unlike previous equilibrium models of the business cycle, this economy displays large fluctuations in hours worked and relatively small fluctuations in productivity. This finding is independent of individuals’ willingness to substitute leisure across time. This and other findings are the result of studying and comparing summary statistics describing this economy, an economy with divisible labor, and post-war U.S. time series.

Detrending, stylized facts and the¬†business cycle, Harvey, A. C., & Jaeger, A. (1993). Detrending, stylized facts and the business cycle.¬†Journal of applied econometrics,¬†8(3), 231-247. The stylized facts of macroeconomic time series can be presented by fitting structural time series models. Within this framework, we analyse the consequences of the widely used detrending technique popularised by Hodrick and Prescott (1980). It is shown that mechanical detrending based on the Hodrick‚ÄďPrescott filter can lead investigators to report spurious cyclical behaviour, and this point is illustrated with empirical examples. Structural time‚Äźseries models also allow investigators to deal explicitly with seasonal and irregular movements that may distort estimated cyclical components. Finally, the structural framework provides a basis for exposing the limitations of ARIMA methodology and models based on a deterministic trend with a single break.

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