While many of the results are consistent with recent closedeconomy studies, the evidence shows that external shocks have significant shortrun effects on economic fluctuations, even in a large. This hamilton type of asymmetry implies that during a recession the economy is hit by large negative shocks pushing the trend growth rate down. Recent developments in macroeconomic theory emphasize that transient economic fluctuations can arise as responses to changes in long run factors in particular, technological improvements rather than short run factors. Or is it consistent with a highly variable but otherwise stable system of conflict. An unexplained residual accounts for the remaining %. On the one hand, the msctm proposal shows that the common stochastic trend shared by output, consumption and investment, is characterized by regime switching in its growth rate. E32, o41 abstract the onesector solowramsey growth model informs how most modern researchers characterize macroeconomic trends and cycles, and evidence supporting the models. Much can be, and indeed much has been, accomplished by following this approach. Trends and fluctuations in the severity of interstate wars. This pdf is a selection from an outofprint volume from the national bureau of economic research volume title. Mendoza department of economics, duke university, durham, nc 27708, usa received 4 september 1994. Common stochastic trends, common cycles, and asymmetry in economic fluctuations, working papers 2001014, federal reserve bank of st. Citeseerx document details isaac councill, lee giles, pradeep teregowda.
The contrasting behavior of real and nominal ratios is consistent with a twosector model of economic growth, with separate production technologies for consumption and investment and two stochastic trends underlying the longrun behavior of all macroeconomic series. Common stochastic trends, common cycles, and asymmetry in economic fluctuations, journal of monetary economics, 49, 11891211. Hp filter is widely accepted also by opponents of neoclassical economics. March 21, 2000 abstract this paper investigates the nature of asymmetry.
A large proportion of the data studied by econometricians are series of observations of the same variables made over time time series. We study empirically the reaction of fiscal policy to changes in the permanent and transitory components of gdp in a panel of countries. First, we use data on household wealth, labour earnings, and consumption to decompose variation in the stock market into three observable empirical disturbances that together account for almost all 87% of the random fluctuations in the us postwar stock market. The first is that economic fluctuations serially correlated variations in the level of economic activity arise from transitory shocks to production possibilities, with. Northholland univariate detrending methods with stochastic trends mark w. Monetary policy expectations and economic fluctuations. Citeseerx stochastic trends and economic fluctuations.
Stock prices, news, and economic fluctuations federal reserve. New evidence on balanced growth, stochastic trends, and economic fluctuations karl whelan central bank and financial services authority of ireland july 2005 abstract the onesector solowramsey growth model informs how most modern researchers characterize macroeconomic trends and cycles, and evidence supporting the models. We show how cointegration restrictions can be used to identify a var system with common stochastic trends subject to transitory and permanent changes in average growth, and how we may investigate the systems responses to permanent shocks, i. Markovswitching stochastic trends and economic fluctuations.
Stochastic trends and economic fluctuations econpapers. Changes in t cause temporary variations in gdp, but do not a. This study examines the role of stochastic trends in real exchange rates and foreign output in explaining economic fluctuations in the united states. Stochastic trends and economic fluctuations in a large open. When these shock s vanish, the tren d level is low er than if the recession h ad never occurred. Stochastic trends and economic fluctuations, working. Stochastic trends and economic fluctuations by robert g. Univariate detrending methods with stochastic trends mark w. Explain what is meant by a deterministic and stochastic. We find evidence that government spending tends to. Nonlinear stochastic trends and economic fluctuations. December 6, 1999 abstract we investigate the nature of asymmetries in u.
Stochastic trends, debt sustainability and fiscal policy imf. Our results suggest that movements in the real stochastic trend account for onehalf to twothirds of the variation in postwar u. This paper uses a longrun restriction implied by a large class of realbusinesscycle. Common stochastic trends, cycles and sectoral fluctuations. Stochastic trends and economic fluctuations james stock. Munich personal repec archive new evidence on balanced growth, stochastic trends, and economic fluctuations whelan, karl university college dublin, school of economics june 2006 online at mpra paper no. Tamayo econ508 economics rutgers november 14, 2011 cesar e.
Pdf markovswitching stochastic trends and economic. Cambridge, ma 028 national bureau of economic research. The cointegration properties of the series are investigated in panel b of table 1 by using the nonparametric cointegration analysis advocated by bierens 1997. This trend varies with agents observations of macroeconomic fundamentals. No 681, international finance discussion papers from board of governors of the federal reserve system u. Stochastic trends and economic fluctuations in a small. This paper uses a longrun restriction implied by a. Common stochastic trends, common cycles, and asymmetry in economic fluctuations, working papers 0021, university of washington, department of economics. Karim barhoumi reda cherif nooman rebei november 2015 abstract we study empirically the reaction of fiscal policy to changes in the permanent and transitory components of gdp in a panel of countries. Monetary policy expectations and economic fluctuations at. We first identify a common stochastic trend and a common transitory component by embedding the permanent income hypothesis within a simple growth model.
This paper investigates the nature of business cycle asymmetry using a dynamic factor model of output, investment, and consumption. Stochastic trends and economic fluctuations ebook, 1987. Common stochastic trends, common cycles, and asymmetry. I postulate a markovswitching stochastic trends model to study both the shortrun responses to permanent shocks and the effects of severe recessions in the longrun growth. Common stochastic trends, common cycles, and asymmetry in economic fluctuations changjin kim korea university jeremy piger board of governors of the federal reserve system october 1999 last revised. March 21, 2000 abstract this paper investigates the nature of asymmetry in u. Stochastic shocks of the european and the greek economic fluctuations. Our results suggest that movements in the real stochastic trend account for one half to twothirds of the variation in postwar u. The application of stochastic processes to the theory of economic development, stochastic control theory, and various aspects of stochastic programming is discussed. Business economics business cycles models national income economic aspects profit profits stochastic analysis research wages wages and salaries. New evidence on balanced growth, stochastic trends, and economic fluctuations.
A probability model of the coincident economic indicators james h. Pdf nonlinear stochastic trends and economic fluctuations. It considers unobserved components models in which the observed series is decomposed. Stochastic trends and economic fluctuations, working paper series, macroeconomic issues 914, federal reserve bank of chicago, revised 1991.
July 24, 2000 abstract this paper investigates the nature of business cycle asymmetry using a dynamic factor model of output, investment, and. Abstract in this paper we describe how restricted vector autoregressions can be employed to examine the sources of macroeconomic fluctuations. However, in systems with nominal variables, the estimates of this common stochastic trend indicate that permanent productivity shocks typically explain less than half of the businesscycle variability in output, consumption, and investment. Plosser, rends and random walks in macroeconmic time series 141 these series are nonstationary stochastic processes with no tendency to return to a trend line. Are business cycles mainly the result of permanent shocks to productivity. Stochastic processes, control, and programming presents some aspects of economics from a stochastic or probabilistic point of view. Stochastic trends and economic fluctuations ideasrepec. Common stochastic trends, common cycles, and asymmetry in economic fluctuations.
We conclude that the analysis of economic fluctuations in models where technological progress is assumed to be exogenous can be misleading. This contrasts with the view that short run fluctuations and shifts in long run trends are largely unrelated. I postulate a markovswitching common stochastic trends model to study both the shortrun responses to permanent shocks and the. Empirical analysis of the term structure of interest rates. Industrial institute for economic and social research iui, box 5501, s. This work is an advanced graduate textbook in econometrics. A common question in the literature on economic fluctuations is whether all business cycles are alike. Periodicity and stochastic trends in economic time series. Common stochastic trends, common cycles, and asymmetry in economic fluctuations changjin kim, a jeremy piger,b akorea university, anamdong, seongbukku, seoul, 6701, korea,bfederal reserve bank of st. Stochastic trends and fiscal policy economic research forum. Markovswitching stochastic trends and economic fluctuations maximo camacho. Louis, mo 63102 abstract this paper investigates the nature of u.
New evidence on balanced growth, stochastic trends, and. Watson harvard uniuersiry and nber, cambridge, ma 028, usa this paper discusses detrending economic time series, when the trend is modelled as a stochastic. Periodicity and stochastic trends in economic time series philip hans franses advanced texts in econometrics. Empirical estimates of these stochastic trends are presented based on a structural var and the role played in the business cycle by shocks to these trends is discussed. Stochastic trends and fluctuations in national income, wages. Termsoftrade uncertainty and economic growth enrique g. Jel e32, c32 a central, surprising, and controversial result of some current research on real business cycles is the claim that a common stochastic trend the cumulative effect of permanent shocks to productivityunderlies the bulk of economic fluctuations. Positive shocks to the exchange rate indicate an unanticipated increase in.
Watson harvard uniuersiry and nber, cambridge, ma 028, usa this paper discusses detrending economic time series, when the trend is modelled as a stochastic process. Stochastic trends and fluctuations in national income, wages, and profits. This paper uses a longrun restriction implied by a large class of realbusinesscycle models. National bureau of economic research recent developments in macroeconomic theory emphasize that transient economic fluctuations can arise as responses to changes in long run factors in particular, technological improvements rather. Stochastic trends and fluctuations in national income.
We find evidence that government spending tends to be countercyclical conditional on temporary shocks and procyclical conditional on permanent shocks. Stochastic trends and economic fluctuations princeton university. Methods aimed at estimation of stochastic trend become an important element of quantitative analysis, much wider than neoclassical economics. Mellander industrial institute for economic and social research iui, box 5501, s114 85 stockholm, sweden. I investigate cointegrating relationships such that, even though the longrun attractors are assumed to be linear, the dynamics of the equilibrium errors depends on the business cycle. By contrast, the present paper estimates the nancial accelerator dsge model with stochastic trends in neutral and investmentspecic technological changes, using the relative price data.
Stochastic trends and economic fluctuations in a small open economy. Stochastic shocks of the european and the greek economic. Stochastic trends and economic fluctuations, nber working papers 2229, national bureau of economic research, inc. I postulate a nonlinear stochastic trends model to study both the shortrun responses to permanent shocks and the e. Pdf stochastic trends and economic fluctuations billy. This contrasts with the view that short run fluctuationsand shifts in long run trends are largely unrelated. Watson 1988 variable trends in economic time series, journal of economic perspectives, 2, 3, 147174 king r. Stochastic trends and economic fluctuations in a small open.
Jan 01, 2005 markovswitching stochastic trends and economic fluctuations markovswitching stochastic trends and economic fluctuations camacho, maximo 20050101 00. In this paper we describe how restricted vector autoregressions can be employed to examine the sources of macroeconomic fluctuations. Dynamic stochastic general equilibrium modeling abbreviated as dsge, or dge, or sometimes sdge is a method in macroeconomics that attempts to explain economic phenomena, such as economic growth and business cycles, and the effects of economic policy, through econometric models based on applied general equilibrium theory and microeconomic principles. Assuming that any stochastic fluctuations in output of a. The implications of this finding are explored in sections 4 and 5.
Stochastic trends, and economic fluctuations karl whelan central bank and financial services authority of ireland. Jel e32, c32 a central, surprising, and controversial result of some current research on real business cycles is the claim that a common stochastic trendthe cumulative effect of permanent shocks to productivityunderlies the bulk of economic fluctuations. I apply these findings to explore the shortrun and longrun asymmetric relationships among output, consumption and investment. Robert king, charles plosser, james stock and mark watson. Common stochastic trends, common cycles, and asymmetry in. States federal reserve bank of san francisco working paper 201619. A large proportion of the data studied by econometricians are series of observations of. The stochastic trend is one that can change in each run due to the random component of the process, as is the case in. In addition, these variables share a common stochastic trend and the great ratios of consumption over output and in vestment o ver output are stationary stochastic processes along the steady state. Using the empirical distributions of interstate war sizes and onset times from 1823 to 2003, we parameterize stationary models of conflict generation that can distinguish trends from statistical fluctuations.
Stochastic trends and economic fluctuations in a large. The first three rows of this table show the results of the lambdamin test, that is the nonparametric version of johansens maximum eigenvalue statistics. If confirmed, this finding would imply that many other forces have been relatively unimportant over historical business cycles, including the monetary and fiscal policy shocks stressed in traditional macroeco. Watson are business cycles mainly the result of permanent shocks to productivity. We identify a common stochastic trend and common transitory component by embedding the permanent income hypothesis within a simple growth model. Common stochastic trends, common cycles, and asymmetry in economic fluctuations changjin kim korea university jeremy piger university of washington october 1999 last revised. Time series decomposition and measurement of business cycles. There is growing evidence that stochastic trends should be taken into account to explain. Markovswitching stochastic trends and economic fluctuations article pdf available in journal of economic dynamics and control 291. Working papers federal reserve bank of chicago, stochastic trends and economic fluctuations, working paper 19914 by robert g.
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