Skip to main content Accesibility Help
×
×
Home

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

  • Sinchan Mitra (a1) and Tara M. Sinclair (a2)
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.

Copyright
Corresponding author
Address correspondence to: Tara M. Sinclair, Department of Economics and ESIA, George Washington University, Washington, DC 20005, USA; e-mail: tsinc@gwu.edu.
References
Hide All
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, 824832.
Andrews, Donald W.K. (1993) Tests for parameter instability and structural change with unknown change point. Econometrica 61, 821856.
Asdrubali, Pierfederico, Sørensen, Bent E., and Yosha, Oved (1996) Channels of interstate risk sharing: United States 1963–90. Quarterly Journal of Economics 111, 10811110.
Backus, David K., Kehoe, Patrick J., and Kydland, Finn E. (1992) International real business cycles. Journal of Political Economy 100, 745775.
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, 395432.
Bai, J. Jushan and Perron, Pierre (1998) Estimating and testing linear models with multiple structural changes. Econometrica 66, 4778.
Basistha, Arabinda (2007) Trend–cycle correlation, drift break and the estimation of trend and cycle in Canadian GDP. Canadian Journal of Economics 40, 584606.
Baxter, Marianne and Crucini, Mario J. (1995) Business cycles and the asset structure of foreign trade. International Economic Review 36, 821853.
Becker, Sascha O. and Hoffman, Mathia (2006) Intra- and international risk sharing in the short run and the long run. European Economic Review 50, 777806.
Ben-David, Dan and Papell, David H. (1998) Slowdowns and meltdowns: Post-war growth evidence from 74 countries. Review of Economics and Statistics 80, 561571.
Berger, Tino (in press) Estimating Europe's natural rates. Empirical Economics.
Blanchard, Olivier J. and Quah, Danny (1989) The dynamic effects of aggregate demand and supply disturbances. American Economic Review 79, 655673.
Caballero, Ricardo J. and Hammour, Mohamad L. (1994) The cleansing effect of recessions. American Economic Review 84, 10751084.
Canova, Fabio and de Nicolo, Gianni (2003) On the sources of business cycles in the G-7. Journal of International Economics 59, 77100.
Centoni, Mario, Cubadda, Gianluca, and Hecq, Alain (2007) Common shocks, common dynamics, and the international business cycle. Economic Modelling 24, 149166.
Chang, Yoosoon, Miller, J. Issac, and Park, Joon Y. (2009). Extracting a common stochastic trend: Theory with some applications. Journal of Econometrics 150, 231247.
Chauvet, Marcelle and Yu, Chengxuan (2006) International business cycles: G7 and OECD countries. Federal Reserve Bank of Atlanta Economic Review First Quarter, 43–54.
Cogley, Timothy (1990) International evidence on the size of the random walk in output. Journal of Political Economy 98, 501518.
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, 253278.
Crucini, Mario J., Kose, Ayhan, and Otrok, Christopher (2008) What Are the Driving Forces of International Business Cycles? NBER working paper 14380.
Diebold, Francis X. and Rudebusch, Glenn D. (1996) Measuring business cycles: A modern perspective. Review of Economics and Statistics 78, 6777.
Doorn, D. (2006) Consequences of Hodrick–Prescott filtering for parameter estimation in a structural model of inventory behaviour. Applied Economics 38, 18631875.
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.
Doyle, Brian M. and Faust, Jon (2005) Breaks in the variability and comovement of G-7 economic growth. Review of Economics and Statistics 87, 721740.
Everaert, Gerdie (2007) Estimating Long-Run Relationships between Observed Integrated Variables by Unobserved Components Methods. SHERPPA, University of Ghent working paper.
Gregory, Allan, Head, Allen, and Raynauld, Jacques (1997) Measuring world business cycles. International Economic Review 38, 677701.
Harding, Don and Pagan, Adrian R. (2005) A suggested framework for classifying the modes of cycle research. Journal of Applied Econometrics 20, 151159.
Hartley, Peter R. and Whitt, Joseph A. Jr. (2003) Macroeconomic fluctuations: Demand or supply, permanent or temporary? European Economic Review 47, 6194.
Harvey, Andrew C. (1993) Time Series Models. Cambridge, MA: MIT Press.
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, 608616.
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.
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, 187204.
Kose, M. Ayhan, Otrok, Christopher, and Whiteman, Charles H. (2003) International business cycles: World, region, and country-specific factors. American Economic Review 93, 12161239.
Kydland, Finn E. and Prescott, Edward C. (1982) Time to build and aggregate fluctuations. Econometrica 50, 13451370.
Lippi, Marco and Reichlin, Lucrezia (1994) Diffusion of technical change and the decomposition of output into trend and cycle. Review of Economic Studies 61, 1930.
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.
McConnell, Margaret and Perez-Quiros, Gabriel (2000) Output fluctuations in the United States: What has changed since the early 1980s? American Economic Review 90, 14641476.
Mills, Terrence C. and Wang, Ping (2003) Have output growth rates stabilised? Evidence from the G-7 economies. Scottish Journal of Political Economy 50, 232246.
Morley, James C. (2007) The slow adjustment of aggregate consumption to permanent income. Journal of Money, Credit and Banking 39, 615638.
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, 235243.
Murray, Christian J. (2003) Cyclical properties of Baxter–King filtered time series. Review of Economics and Statistics 85, 472–76.
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.
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.
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.
Perron, Pierre and Wada, Tatsuma (2009) Let's take a break: Trends and cycles in U.S. real GDP. Journal of Monetary Economics 56, 749765.
Prescott, Edward C. (1987) Theory ahead of business cycle measurement. Carnegie–Rochester Conference on Public Policy 25, 1144.
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.
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, 529542.
Sørensen, Bent E. and Yosha, Oved (1998) International risk sharing and European monetary unification. Journal of International Economics 45, 211238.
Stock, James H. and Watson, Mark W. (1988) Variable trends in economic time series. Journal of Economic Perspectives 2, 147174.
Stock, James H. and Watson, Mark W. (2005) Understanding changes in international business cycle dynamics. Journal of the European Economic Association 3, 9661006.
Vahid, Farshid and Engle, Robert F. (1993) Common trends and common cycles. Journal of Applied Econometrics 8, 341360.
Vahid, Farshid and Engle, Robert F. (1997) Codependent cycles. Journal of Econometrics 80, 199221.
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.
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.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Keywords

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed