🔍 One of the major goals of modern macroeconomics is to understand how shocks affect the economy and how their effects propagate over time.

But explaining these dynamics remains a challenge—even for experts. As any microeconomist will tell you: sometimes, explaining what an instrumental variable is to a non-economist is harder than the econometrics behind it! 😅

📉 The Reality Behind GDP

GDP doesn’t follow a straight path. It fluctuates, reacts, and deviates—these are business cycles.

Understanding these fluctuations is essential to:

• anticipate crises,
• design effective public policies, and
• guide informed economic decisions.

I illustrated this by decomposing Canadian GDP using the Hodrick–Prescott filter, which separates:

• Trend (long-term growth path)
• Cycle (short-term deviations from trend)

📊 Visualization

Legend:

• Blue: Observed GDP
• Green: HP Trend
• Red: HP Cycle
• Gray zones: Estimated recession periods

🧰 Methodology & Data

• Method: Hodrick–Prescott filter (HP Filter)
• Data source: Chaire en macroéconomie et prévisions (CMP), Canada
• Tools used: Python (pandas, statsmodels, matplotlib)

🧠 Why It Matters

Whether in cooking, medicine, or macroeconomics—precision matters.

• In cooking: a wrong dose can ruin the dish.
• In medicine: a milligram too much can have serious consequences.
• In macroeconomics: misjudging a shock or reacting late can cost thousands of jobs or worsen a recession.

📚 Suggested Readings

• Blanchard, O. (2025) — Convergence? Thoughts about the Evolution of Macroeconomics
• Ramey, V. (2016) — Macroeconomic Shocks and Their Propagation, Handbook of Macroeconomics, Vol. 2, Chap. 2

🏷️ Tags

#Macroeconomics, #HPFilter, #BusinessCycle, #EconomicPolicy, #CanadaGDP, #Python, #TimeSeries, #Blanchard, #Ramey, #NBER