Economic Cycles, Indicators, and Fiscal Policy

Business Cycles: Causes and Phases

Causes:

• Endogenous cycles: Causes arising from the internal logic of economic variables.
• Exogenous cycles: Circumstances external to the economy, such as political events or scientific discoveries.

Duration: Short-term cycles: Between 40 and 80 months.

Phases of the Business Cycle

• Expansion or Recovery: An upswing characterized by increased investment, consumer demand (NSF), and GDP. This phase benefits companies, reduces unemployment, and causes consumer prices to rise.
• Boom or Peak: The maximum level of investment and consumption where aggregate demand and GDP reach their peak. Company benefits are maximized, full employment is achieved, and the price index may increase significantly.
• Contraction or Recession: Characterized by a decrease in stocks, company profits, investment, and demand (NSF). GDP falls, unemployment rises, and the consumer price index decreases.
• Trough (Fund): A period involving the loss of business and economic bottoming out.

Key Economic Conjuncture Indicators

• Industrial Production Index (IPI): Measures monthly changes in production activity, excluding construction.
• Private Consumption (INE): Used to determine the origin and amount of family income.
• Public Consumption: The purchase of goods and services by the Public Administration.
• Quarterly National Accounts of Spain: The accounting of economic operations within the country.
• Labour Force Survey (LFS/EPA): Analyzes the economic activity of the population by gender, age, education, and occupation.
• Harmonized Index of Consumer Prices (HICP): Used for comparing inflation across EU countries.
• Industrial Price Index (IPRI): Measures price changes within the industry.
• Survey of Wages in Industry and Services (ES): Measures the average profit per worker per hour of work, excluding non-worked hours.
• Statistics of Collective Agreements: Company information regarding contractual wages and worker agreements.
• Liquid Availabilities: The total amount of money in circulation.
• Interest Rates: Legal interest rates for active and passive operations in banks.

Economic Stabilizers

• Taxation: Direct taxes such as Income Tax and Corporate Tax. During expansionary phases, these reduce the possibility of excess consumption; during recession phases, they help recover lower incomes.
• Social Security: Ensures unemployment benefits, maintaining a level of energy, consumption, and activity.
• Retirement Pensions: Contribute to maintaining aggregate demand (NSF) via private consumption.

Expansionary and Restrictive Policies

Expansionary Policies

These produce economic stimulus through:

• Increased investment and public spending to boost the public component.
• Reduction of taxes to stimulate private income.
• Reduction of banking legal coefficients and interest rates to increase demand for credit and loans for businesses and households.
• Increased exports and lower exchange rates to stimulate production.

Restrictive Policies

Used when accelerated growth causes unwanted effects like inflation:

• Increased interest rates to make borrowing more expensive.
• Increased selective imports in inflationary sectors to cause a decline in prices through competition and supply.
• Decreasing investment to lower aggregate demand.

Example of Expansionary Policy Challenges

Expansionary policies may suffer delays, such as in municipal (ayuntamientos) aid due to negotiations. High public expenditures during periods of high unemployment might only result in companies reducing stocks rather than increasing production. If no one claims the goods, it is possible that these policies will not achieve the desired results.