Hostname: page-component-cd9895bd7-jn8rn Total loading time: 0 Render date: 2024-12-18T21:08:38.188Z Has data issue: false hasContentIssue false
  • English
  • Français

OUTPUT FLUCTUATIONS IN THE G-7: AN UNOBSERVED COMPONENTS APPROACH

Published online by Cambridge University Press:  12 December 2011

Sinchan Mitra  and
Tara M. Sinclair
Sinchan Mitra
Affiliation:
The University of Queensland
Tara M. Sinclair*
Affiliation:
The George Washington University
*
Address correspondence to: Tara M. Sinclair, Department of Economics and ESIA, George Washington University, Washington, DC 20005, USA; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper proposes a multivariate unobserved-components model to simultaneously decompose the real GDP for each of the G-7 countries into its respective trend and cycle components. In contrast to previous literature, our model allows for explicit correlation between all the contemporaneous trend and cycle shocks. We find that all the G-7 countries have highly variable stochastic permanent components for output, even once we allow for structural breaks. We also find that common restrictions on the correlations between trend and cycle shocks are rejected by the data. In particular, we find that correlations across permanent and transitory shocks are important both within and across countries.

Keywords

Trend-Cycle DecompositionsBusiness CyclesCorrelationsReal GDP
Type
Articles
Information
Macroeconomic Dynamics , Volume 16 , Issue 3 , June 2012 , pp. 396 - 422
Copyright
Copyright © Cambridge University Press 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Ahmed, Shaghil, Levin, Andrew, and Wilson, Beth Anne (2004) Recent U.S. macroeconomic stability: Good policies, good practices, or good luck? Review of Economics and Statistics 86, 824–832.CrossRefGoogle Scholar
Andrews, Donald W.K. (1993) Tests for parameter instability and structural change with unknown change point. Econometrica 61, 821–856.CrossRefGoogle Scholar
Asdrubali, Pierfederico, Sørensen, Bent E., and Yosha, Oved (1996) Channels of interstate risk sharing: United States 1963–90. Quarterly Journal of Economics 111, 1081–1110.CrossRefGoogle Scholar
Backus, David K., Kehoe, Patrick J., and Kydland, Finn E. (1992) International real business cycles. Journal of Political Economy 100, 745–775.CrossRefGoogle Scholar
Bai, Jushan, Lumsdaine, Robin L., and Stock, James H. (1998) Testing for and dating common breaks in multivariate time series. Review of Economic Studies 65, 395–432.CrossRefGoogle Scholar
Bai, J. Jushan and Perron, Pierre (1998) Estimating and testing linear models with multiple structural changes. Econometrica 66, 47–78.CrossRefGoogle Scholar
Basistha, Arabinda (2007) Trend–cycle correlation, drift break and the estimation of trend and cycle in Canadian GDP. Canadian Journal of Economics 40, 584–606.CrossRefGoogle Scholar
Baxter, Marianne and Crucini, Mario J. (1995) Business cycles and the asset structure of foreign trade. International Economic Review 36, 821–853.CrossRefGoogle Scholar
Becker, Sascha O. and Hoffman, Mathia (2006) Intra- and international risk sharing in the short run and the long run. European Economic Review 50, 777–806.CrossRefGoogle Scholar
Ben-David, Dan and Papell, David H. (1998) Slowdowns and meltdowns: Post-war growth evidence from 74 countries. Review of Economics and Statistics 80, 561–571.CrossRefGoogle Scholar
Berger, Tino (in press) Estimating Europe's natural rates. Empirical Economics.Google Scholar
Blanchard, Olivier J. and Quah, Danny (1989) The dynamic effects of aggregate demand and supply disturbances. American Economic Review 79, 655–673.Google Scholar
Caballero, Ricardo J. and Hammour, Mohamad L. (1994) The cleansing effect of recessions. American Economic Review 84, 1075–1084.Google Scholar
Canova, Fabio and de Nicolo, Gianni (2003) On the sources of business cycles in the G-7. Journal of International Economics 59, 77–100.CrossRefGoogle Scholar
Centoni, Mario, Cubadda, Gianluca, and Hecq, Alain (2007) Common shocks, common dynamics, and the international business cycle. Economic Modelling 24, 149–166.CrossRefGoogle Scholar
Chang, Yoosoon, Miller, J. Issac, and Park, Joon Y. (2009). Extracting a common stochastic trend: Theory with some applications. Journal of Econometrics 150, 231–247.CrossRefGoogle Scholar
Chauvet, Marcelle and Yu, Chengxuan (2006) International business cycles: G7 and OECD countries. Federal Reserve Bank of Atlanta Economic Review First Quarter, 43–54.Google Scholar
Cogley, Timothy (1990) International evidence on the size of the random walk in output. Journal of Political Economy 98, 501–518.CrossRefGoogle Scholar
Cogley, Timothy and Nason, James M. (1995) Effects of the Hodrick–Prescott filter on trend and difference stationary time series: Implications for business cycle research. Journal of Economic Dynamics and Control 19, 253–278.CrossRefGoogle Scholar
Crucini, Mario J., Kose, Ayhan, and Otrok, Christopher (2008) What Are the Driving Forces of International Business Cycles? NBER working paper 14380.CrossRefGoogle Scholar
Diebold, Francis X. and Rudebusch, Glenn D. (1996) Measuring business cycles: A modern perspective. Review of Economics and Statistics 78, 67–77.CrossRefGoogle Scholar
Doorn, D. (2006) Consequences of Hodrick–Prescott filtering for parameter estimation in a structural model of inventory behaviour. Applied Economics 38, 1863–1875.CrossRefGoogle Scholar
Doyle, Brian M. and Faust, Jon (2002) An investigation of co-movements among the growth rates of the G-7 countries. Federal Reserve Bulletin October, 427–437.CrossRefGoogle Scholar
Doyle, Brian M. and Faust, Jon (2005) Breaks in the variability and comovement of G-7 economic growth. Review of Economics and Statistics 87, 721–740.CrossRefGoogle Scholar
Everaert, Gerdie (2007) Estimating Long-Run Relationships between Observed Integrated Variables by Unobserved Components Methods. SHERPPA, University of Ghent working paper.Google Scholar
Gregory, Allan, Head, Allen, and Raynauld, Jacques (1997) Measuring world business cycles. International Economic Review 38, 677–701.CrossRefGoogle Scholar
Harding, Don and Pagan, Adrian R. (2005) A suggested framework for classifying the modes of cycle research. Journal of Applied Econometrics 20, 151–159.CrossRefGoogle Scholar
Hartley, Peter R. and Whitt, Joseph A. Jr. (2003) Macroeconomic fluctuations: Demand or supply, permanent or temporary? European Economic Review 47, 61–94.CrossRefGoogle Scholar
Harvey, Andrew C. (1993) Time Series Models. Cambridge, MA: MIT Press.Google Scholar
Kim, Chang-Jin and Nelson, Charles R. (1999a) Has the U.S. economy become more stable? A Bayesian approach based on a Markov-switching model of the business cycle. Review of Economics and Statistics 81, 608–616.CrossRefGoogle Scholar
Kim, Chang-Jin and Nelson, Charles R. (1999b) State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications. Cambridge, MA: MIT Press.Google Scholar
Kim, Chang-Jin, Piger, Jeremy, and Startz, Richard (2007) The dynamic relationship between permanent and transitory components of U.S. business cycles. Journal of Money, Credit and Banking 39, 187–204.CrossRefGoogle Scholar
Kose, M. Ayhan, Otrok, Christopher, and Whiteman, Charles H. (2003) International business cycles: World, region, and country-specific factors. American Economic Review 93, 1216–1239.CrossRefGoogle Scholar
Kydland, Finn E. and Prescott, Edward C. (1982) Time to build and aggregate fluctuations. Econometrica 50, 1345–1370.CrossRefGoogle Scholar
Lippi, Marco and Reichlin, Lucrezia (1994) Diffusion of technical change and the decomposition of output into trend and cycle. Review of Economic Studies 61, 19–30.CrossRefGoogle Scholar
Ma, Jun and Wohar, Mark E. (2009) Real and Nominal Business Cycles: New Evidence from a Generalized Unobserved Components Model. Working paper, Department of Economics, Finance, and Legal Studies, University of Alabama.Google Scholar
McConnell, Margaret and Perez-Quiros, Gabriel (2000) Output fluctuations in the United States: What has changed since the early 1980s? American Economic Review 90, 1464–1476.CrossRefGoogle Scholar
Mills, Terrence C. and Wang, Ping (2003) Have output growth rates stabilised? Evidence from the G-7 economies. Scottish Journal of Political Economy 50, 232–246.CrossRefGoogle Scholar
Morley, James C. (2007) The slow adjustment of aggregate consumption to permanent income. Journal of Money, Credit and Banking 39, 615–638.CrossRefGoogle Scholar
Morley, James C., Nelson, Charles R., and Zivot, Eric (2003) Why are the Beveridge–Nelson and unobserved-components decompositions of GDP so different? Review of Economics and Statistics 85, 235–243.CrossRefGoogle Scholar
Murray, Christian J. (2003) Cyclical properties of Baxter–King filtered time series. Review of Economics and Statistics 85, 472–76.CrossRefGoogle Scholar
Nagakura, Daisuke (2007) Inference on the Correlation between Permanent and Transitory Shocks for Unidentified Unobserved Components Models. SSRN working paper. Available at http://ssrn.com/abstract=981646. Accessed October 19, 2010.Google Scholar
Nagakura, Daisuke (2008) How Are Shocks to Trend and Cycle Correlated? A Simple Methodology for Unidentified Unobserved Components Models. IMES discussion paper 2008-E-24.Google Scholar
Papanyan, Shushanik (2007) The Dynamics of the Permanent and Transitory Components in International Business Cycles. SSRN working paper. Available at http://ssrn.com/abstract=794088. Accessed October 19, 2010.Google Scholar
Perron, Pierre and Wada, Tatsuma (2009) Let's take a break: Trends and cycles in U.S. real GDP. Journal of Monetary Economics 56, 749–765.CrossRefGoogle Scholar
Prescott, Edward C. (1987) Theory ahead of business cycle measurement. Carnegie–Rochester Conference on Public Policy 25, 11–44.CrossRefGoogle Scholar
Schleicher, Christophe (2003) Structural time series models with common trends and common cycles. In Computing in Economics and Finance 2003–108. Seattle, WA: Society for Computational Economics.Google Scholar
Sinclair, Tara M. (2009) The relationships between permanent and transitory movements in U.S. output and the unemployment rate. Journal of Money, Credit and Banking 41, 529–542.CrossRefGoogle Scholar
Sørensen, Bent E. and Yosha, Oved (1998) International risk sharing and European monetary unification. Journal of International Economics 45, 211–238.CrossRefGoogle Scholar
Stock, James H. and Watson, Mark W. (1988) Variable trends in economic time series. Journal of Economic Perspectives 2, 147–174.CrossRefGoogle Scholar
Stock, James H. and Watson, Mark W. (2005) Understanding changes in international business cycle dynamics. Journal of the European Economic Association 3, 966–1006.CrossRefGoogle Scholar
Vahid, Farshid and Engle, Robert F. (1993) Common trends and common cycles. Journal of Applied Econometrics 8, 341–360.Google Scholar
Vahid, Farshid and Engle, Robert F. (1997) Codependent cycles. Journal of Econometrics 80, 199–221.CrossRefGoogle Scholar
Van Dijk, Dick, Osborn, Denise R., and Sensier, Marianne (2002) Changes in Variability of the Business Cycle in the G7 Countries. Centre for Growth and Business Cycle Research discussion paper 16, University of Manchester.Google Scholar
Wada, Tatsuma and Perron, Pierre (2006) An Alternative Trend-Cycle Decomposition using a State Space Model with Mixtures of Normals: Specifications and Applications to International Data. Working paper, Boston University.Google Scholar