Cyclical asymmetry is an economic term which describes any large imbalance in economic factors that occur due to purely cyclical reactions by a market or nation. This can include employment rates, debt retention, interest rates, bond strengths, or stock market imbalances.
Types of cyclical asymmetry
There are two main types of CA: fiscal and economic. While there are equivalents to cyclical asymmetries in investment banking and stock market transactions, these systems are designed to deal with such things.
Fiscal cyclical asymmetry
Fiscal CA is based on national or international changes to fiscal policy as a result of cyclical intervention in money markets or currency exchanges. A simple example is the reaction of the US Federal Reserve to raise interest rates when the dollar performs too well against other currencies such as the euro and the yen. Since currency exchanges are often predilated on the results of economic changes such as quarterly profit results, the Federal Reserve has to be cautious not to overreact or such fiscal changes will actually excacerbate the situation by making investment in America more attractive than equalizing exchange rates. When this does occur, it is a cyclical asymmetry.
Economic cyclical asymmetry
Economic CA is usually based on cyclical trends in national markets, such as the labor market. A simple example of this can be found in the yearly changes in demand for labor. Job markets are, by nature, cyclical, with upswings in certain sectors such as retail near year's end, and in construction during the spring and summer. While job creation and destruction as a national whole average usually equalize, when disturbances in the markets occur, the disruptions can cause higher than usual unemployment, which has a negative effect on the economy and causes further economic stress.
Causes of cyclical asymmetry
The primary cause of cyclical asymmetry is rapid change in an otherwise regularly cyclical model, and overreactions to counteract such changes. Similar to a man walking across a swaying tightrope, any economic model subject to cyclical stressors must find a balance. When it does not, cyclical asymmetries occur.
Cyclical asymmetry is a form of nonlinear economics and, as such, its effects can be widely varied. However, the primary identification of a cyclical asymmetry is that resources, results, or actions taken to correct a change result in an unequal distribution of a resource or factor, which always leads to a disruption.
In economics, particularly with fiscal policy, poorly chosen compensating actions can result in multiple CAs, spiralling out of control into depression. The Great Depression could be construed[by whom?] as a result of cyclical asymmetry carried to ridiculous extremes, with most economic and fiscal policy bent to the ideal of mass speculation and investment over rational investment on assets.
- ^ Timo Teräsvirta. Modelling Nonlinear Economic Relationships Published 1993 Oxford University Press. ISBN 019877320X
- ^ R. Burdekin, Farrokh K. Langdana. Confidence, Credibility and Macroeconomic Policy: past, present, future. Published 1995 Routledge (UK) ISBN 0415102782
- ^ J. Bradford De Long & Lawrence H. Summers, 1986. "Are Business Cycles Symmetric?," NBER Working Papers 1444, National Bureau of Economic Research, Inc
- ^ Ramsey, J.B. & Rothman, P., 1993. "Time Irreversibility and Business Cycle Asymmetry," Working Papers 93-39, C.V. Starr Center for Applied Economics, New York University
- ^ David Andolfatto. Evidence and Theory on the Cyclical Asymmetry in Unemployment Rate Fluctuations. Canadian Journal of Economics, 1997, vol. 30, issue 3, pages 709–21
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