Procyclical economic policy

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In the economy, pro-cyclical economic policy means that the effect of economic policy measures (see economic policy ) points in the same direction as the current economic fluctuations . The economy is therefore not balanced, but its fluctuations are reinforced. The counterpart is the countercyclical economic policy .

Classification and demarcation

Procyclical economic policy is initially a generic term for other economic policy sub-disciplines. One can also differentiate between a procyclical fiscal policy and a procyclical monetary policy .

A pro-cyclical economic policy can also be the unwanted result of an anti-cyclical policy, due to time lags of the economic policy measures. This potential procyclical effect is a major problem in business cycle policy in general.

In a Keynesian state an essential task would be to limit the economic adjustment processes and to stabilize the expectations of the economic subjects . This implies that this state renounces a procyclical economic policy and thus a deepening of the prevailing market constellation.

Some authors see in reality a more pro-cyclical behavior by the federal, state and local governments.

Examples

A number of mechanisms have a procyclical effect:

  • Inflation targeting : The inflation rate is a so-called lagging indicator, which can lead to the fact that the use of monetary policy funds can have a procyclical effect.
  • The state's tax revenues follow the business cycle . This means that the state has more funds at its disposal in boom phases than in crisis. A spending policy that uses the cyclical improvement in income in the boom to increase government spending or the cyclically deteriorated income in the crisis to reduce expenditure (see austerity policy ) has a pro-cyclical effect.
  • Corporate profits follow the business cycle. A wage policy that orientates wage increases to the development of corporate profits has a procyclical effect. A wage policy that links wage increases to inflation (see e.g. Scala mobile ) also has a procyclical effect , since the inflation rate also follows the business cycle.
  • The amount of the contribution to social security , in particular unemployment insurance , increases with the unemployment rate , provided this is organized on a pay-as-you-go basis. The increase in contributions in times of high unemployment has a procyclical effect.
  • According to the law, banks must have adequate capital adequacy for the credit risk . Loan default rates rise during the crisis. This reduces the bank's own funds and at the same time increases the requirement for own funds, as the creditworthiness of the loan portfolio deteriorates. The bank must therefore (at the wrong time, because in the crisis) raise additional equity or limit lending, which has a procyclical effect.

Any policy that does not act against these mechanisms (e.g. by setting up provisions in the boom or deficit spending in the crisis) automatically has a procyclical effect.

Individual evidence

  1. ^ Procyclical - definition in the Gabler Wirtschaftslexikon.
  2. ↑ a b Michael Olsson, Dirk Piekenbrock: Compact Lexicon Economic Policy: 3,200 terms looking up, understanding, applying . Springer Gabler; Edition: 2013 (November 30, 2013). ISBN 978-3658030360 . P. 283.
  3. ↑ Martina Metzger: Economic Policy and Development: A Keynesian Critique of Structuralism and Neoliberalism . Campus Verlag; Edition: 1 (February 16, 2004). ISBN 978-3593373850 . P. 276.
  4. ↑ Helmut Walter: Growth, structural change and competition: Festschrift for Klaus Herdzina special cover . Lucius & Lucius Verlagsgesellschaft mbH (August 2000). ISBN 978-3828201460 . P. 151.
  5. ↑ Inflation targeting - definition in the Gabler Wirtschaftslexikon.