Pro-cyclical: An economic variable positively correlates with and grows in parallel with the overall economy is pro-cyclical.
Counter-cyclical: Those variables that increase when the overall economy is slowing down are counter-cyclical.
Example: Personal incomes and business profits generally rise when the economy is growing, ie. pro-cyclical.
Unemployment is counter-cyclical because it rises when the economy weakens.
The financial regulations of Basel 2 are critized for possibly being pro-cyclical.
Under Basel 2, banks must increase their capital ratios when they face greater risk. This might mean they have less to lend in a recession, which could make the economic downturn worse.
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