Countercyclical
Encyclopedia
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.
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
advocates the use of automatic
and discretionary countercyclical policies to lessen the impact of the business cycle
. One example of an automatically countercyclical fiscal policy
is progressive taxation. 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 monetarism
and new classical macroeconomics
, hold that countercyclical policies may be counterproductive or destabilizing, and therefore favor a laissez-faire
fiscal policy as a better method for maintaining an overall robust economy.
with the overall state of the economy
is said to be 'countercyclical'. 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'. Unemployment is an example of a countercyclical variable.
Similarly, in finance, an asset that tends to do well while the economy as a whole is doing poorly, is typically referred to as countercyclical. For example, this could be a business, or a financial instrument whose value is derived from a business, that sells an inferior good
.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
to describe how an economic quantity is related to economic fluctuations. It is the opposite of 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:...
. However, it has more than one meaning.
Meaning in policy making
An economic or financial policy is called 'countercyclical' (or sometimes 'activist') if it works against the cyclicalBusiness cycle
The term business cycle refers to economy-wide fluctuations in production or economic activity over several months or years...
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
Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...
advocates the use of automatic
Automatic stabilizer
In macroeconomics, automatic stabilizers describes how modern government budget policies, particularly income taxes and welfare spending, act to dampen fluctuations in real GDP....
and discretionary countercyclical policies to lessen the impact of the business cycle
Business cycle
The term business cycle refers to economy-wide fluctuations in production or economic activity over several months or years...
. One example of an automatically countercyclical fiscal policy
Fiscal policy
In economics and political science, fiscal policy is the use of government expenditure and revenue collection to influence the economy....
is progressive taxation. 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 monetarism
Monetarism
Monetarism is a tendency in economic thought that emphasizes the role of governments in controlling the amount of money in circulation. It is the view within monetary economics that variation in the money supply has major influences on national output in the short run and the price level over...
and new classical macroeconomics
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 foundations based on microeconomics...
, hold that countercyclical policies may be counterproductive or destabilizing, and therefore favor a laissez-faire
Laissez-faire
In economics, laissez-faire describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies....
fiscal policy as a better method for maintaining an overall robust economy.
Meaning in business cycle theory
In business cycle theory, any economic quantity that is negatively 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 'countercyclical'. 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'. Unemployment is an example of a countercyclical variable.
Similarly, in finance, an asset that tends to do well while the economy as a whole is doing poorly, is typically referred to as countercyclical. For example, this could be a business, or a financial instrument whose value is derived from a business, that sells an inferior good
Inferior good
In consumer theory, an inferior good is a good that decreases in demand when consumer income rises, unlike normal goods, for which the opposite is observed. Normal goods are those for which consumers' demand increases when their income increases....
.