Saturday Brain Storming Thought (104)-13/03/2021 

COMPILED BY ER AVINASH KULKARNI

PROCYCLICAL POLICY IN VALUATION

A Procyclical fiscal policy can be summarized simply as governments choosing to increase government spending and reduce taxes during an economic expansion, but reduce spending and increase taxes during a recession

Meaning of Procyclical

Procyclical means something with a positive effect

Meaning of Countercyclical

Countercyclical means a negative effect

Both there’s can also be used to refer to a governments approach to spending and taxes

Procyclical inflation

Procyclic refers to a condition of a positive correlation between the value of a good, a service or an economic indicator and the overall state of economy

Procyclicality of financial system

Strictly speaking, Procyclicality refers to the tendency of financial variables to fluctuate around a trend during the economic cycle

Increased Procyclicality thus simply means fluctuations with broader amplitude

Procyclicality in inflation

During recessions, when the unemployment rate is high and there is excess supply, businesses are less apt to raise prices, causing inflation to decline

If the sectors inflation rate shows a negative and statistically significant relationship with the unemployment gap, we categorize the sector as Procyclical

Procyclic economic indicators

Procyclic refers to a condition of a positive correlation between the value of a good, a service or an economic indicator and the overall state of the economy

Procyclic economic indicator is one that moves in the same direction of economy

economic indicators for global investors

1) GDP

2) employment indicators

3) consumer price index

4) central bank minutes

5) PMI manufacturing and services

6) stock market

7) balance of trades

8) housing starts

9) interest rates

10) inflation

Procyclical variable

A variable is Procyclical if it’s deviations from trend are positively correlated with the output gap

Countercyclical variable

A variable is Countercyclical if it’s deviations from trend are negatively correlated with the output gap

Acyclical variable

A variable is Acyclical if it is not Procyclical nor Countercyclical

Leading variable

If a macro variable helps in predicting the future path of RGDP

Lagging variable

If RGDP helps in predicting the future path of the variable, it is a lagging variable

Coincident variable

Variables which neither lead nor lag RGDP are called coincident variables

Measure of cyclical variability

Finally, we are interested in the volatility of the macroeconomic variables

A measure of cyclical variability is the standard deviation of the percentage deviations from trend

RGDP

Real Gross Domestic Product (RGDP) is a macroeconomic statistics that measures the value of the goods and services produced by an economy in a specific period, adjusted for inflation

Essentially RGDP measures a country’s total economic output, adjusted for price changes

Standard deviation

It is a measure of the amount of variation or dispersion of a set of values

Cyclical industries

A cyclical industry refers to an industry whose revenue generation capabilities are tied to the business cycle ie performance is correlated to the business cycle

1) Auto components

2) construction

3) semiconductor

4) steel

5) Airline

6) Hotels, restarunts and leisure

7) Textile, apparel and luxury goods

Business Cycle

Expansion
Peak
Recession
Depression
Trough
Recovery

And continues

Characteristics of business cycles

1) fluctuations of aggregate economic activity

2) cycles ie expansion/boom and contraction/recession

Peak and trough are the turning points of business cycle

3) comovements of many macro variables over the business cycle

4) business cycles are recurrent but not periodic
5) persistence of economic activity

Compiled by:-

Er. Avinash Kulkarni

Chartered Engineer
Govt Regd Valuer
IBBI Regd Valuer