procyclicitet

Procyclicity refers to the tendency of economic policies, institutions, or behaviors to amplify rather than dampen business cycle fluctuations. In a procyclical environment, policies or behaviors that are expansionary during booms become contractionary during recessions, and vice versa. This exacerbates the ups and downs of the economy, leading to larger swings than would otherwise occur.

A common example is fiscal policy. Procyclical fiscal policy occurs when governments increase spending or cut taxes during economic booms, further fueling inflation and overheating the economy. Conversely, they might cut spending or raise taxes during a recession, which deepens the downturn by reducing aggregate demand. This is in contrast to countercyclical fiscal policy, where governments aim to moderate the business cycle by stimulating the economy during recessions and cooling it down during booms.

Financial markets can also exhibit procyclical behavior. During economic expansions, lenders may become more willing to extend credit, and asset prices may rise rapidly, creating a bubble. When the economy turns, lending tightens, asset prices fall, and financial institutions may face liquidity problems, contributing to a sharper downturn. Similarly, consumer and business confidence can be procyclical. Optimism during booms encourages spending and investment, while pessimism during downturns leads to reduced activity, reinforcing the economic cycle. The presence of procyclical elements in an economy can make it more vulnerable to severe recessions and inflationary periods.