Masood Mortazavi's Weblog

Wednesday May 11, 2005

[ Economics ] Economic Cycles and Their Time Scales

In physical sciences, we often speak of characteristic times (or time "scales") for the behavior of dynamical systems.
For example, the pendulum has its period, a flying object has the time it takes to travel its longest dimension, a piece of radioactive material has a half-life (or many half-lives depending on its composition), and blood has its absorption rates for oxygen, as does Hemoglobin. Even Hubble's red-shift has a characteristic time interpretation.

Related phenomena occuring at different "layers" can have widely differing time scales, particularly when aggregation is involved. Part of the attractiveness of a transistor is that it brings time scales at different levels of a phenomenon quite close to each other.

The macro economy, as a dynamical system, provides another interesting case for the study of system dynamics through characteristic times (and frequency spectrum).

Macroeconomists often worry about characteristic times for economic cycles, and even more, about the economic forces that get us into a cycle and bring us out into the next one. They speak of recession and expansion periods, where the actual GDP (Gross Domestic Product) goes through peaks and troughs (around an often constantly-rising "natual" GDP). In general, during an expansion, inflation speeds up and unemployment goes down. In a contraction, inflation slows down and unemployment rises. (Of course, stagflation, where inflation and recession are combined is the nightmare of the economic policy makers.)

Except for the period of The Great Depression and the post-War boom, the economic cycles in the U.S. have had a characteristic time of about 5 to 10 years. So, the scope of policy is limited to those time scales.

We should note in passing that, like many aggregate dynamic behavior, the actual economic cycle data has several time scales at its macro-level.

When bonds of different duration are issued by the Treasury, the Treasury is attempting to control the dynamics with instruments that act across different time scales.

Economic Cycles, Economics, Dynamical Systems, Dynamics, Time