Aggregation, Persistence and Volatility in a Macro Model
AbstractWe introduce firm heterogeneity into the standard monopolistically competitive real business cycle (RBC) model. The fundamental equilibrium path is derived and the time-series properties of aggregate GDP are studied analytically. Although firms' productivities are subject to temporary shocks, the aggregate process displays a surprising novel form of nonlinearity and long memory which had not been built into the model at the outset. This aggregate GDP turns out to have very different properties from log-linear time-series models such as auto-regressive (AR) models and their extensions. It displays very strong persistence, which ends abruptly with a sudden change of tendency, giving its autocorrelation function (ACF) an S-shape. Although persistent, it is mean-reverting, unlike the everlasting memory of unit-root processes. Its volatility is of a greater order of magnitude than that of any of its components, so small micro-shocks can generate large macro fluctuations. It is also characterized by long, asymmetric cycles of random lengths. Increased monopoly power tends to reduce the amplitude and increase the persistence of business cycles. Strikingly, we find that the empirical ACFs constructed from GDP data for the U.K. and the U.S. display this characteristic S-shape. Copyright 2002, Wiley-Blackwell.
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Bibliographic InfoArticle provided by Oxford University Press in its journal The Review of Economic Studies.
Volume (Year): 69 (2002)
Issue (Month): 4 ()
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Other versions of this item:
- Abadir, Karim & Talmain, Gabriel, 2002. "Aggregation, Persistence and Volatility in a Macro Model," Review of Economic Studies, Wiley Blackwell, vol. 69(4), pages 749-79, October.
- Karim Abadir & Gabriel Talmain, 2001. "Aggregation, Persistence and Volatility in a Macromodel," Working Papers w200106, Banco de Portugal, Economics and Research Department.
- Karim Abadir & Gabriel Talmain, . "Aggregation, Persistence and Volatility in a Macromodel," Discussion Papers 01/03, Department of Economics, University of York.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
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