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The Great Moderation Under the Microscope: Decomposition of Macroeconomic Cycles in US and UK Aggregate Demand

In: Wavelet Applications in Economics and Finance

Author

Listed:
  • Patrick M. Crowley

    (Texas A&M University)

  • Andrew Hughes Hallett

    (George Mason University)

Abstract

In this paper the relationship between the growth of real GDP components is explored in the frequency domain using both static and dynamic wavelet analysis. This analysis is carried out separately for both the US and the UK using quarterly data, and the results are found to be substantially different in the two countries. One of the key findings in this research is that the “great moderation” shows up only at certain frequencies, and not in all components of real GDP. We use these results to explain why the incidence of the great moderation has been so patchy across GDP components, countries and time periods. This also explains why it has been so hard to detect periods of moderation (or otherwise) reliably in the aggregate data. We argue it cannot be done without breaking the GDP components down into their frequency components across time and these results show why: the predictions of traditional real business cycle theory often appear not to be upheld in the data.

Suggested Citation

  • Patrick M. Crowley & Andrew Hughes Hallett, 2014. "The Great Moderation Under the Microscope: Decomposition of Macroeconomic Cycles in US and UK Aggregate Demand," Dynamic Modeling and Econometrics in Economics and Finance, in: Marco Gallegati & Willi Semmler (ed.), Wavelet Applications in Economics and Finance, edition 127, pages 47-71, Springer.
    • Handle: RePEc:spr:dymchp:978-3-319-07061-2_3
    DOI: 10.1007/978-3-319-07061-2_3
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    References listed on IDEAS

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    1. repec:zbw:bofrdp:2011_010 is not listed on IDEAS
    2. Honkapohja, Seppo & Evans, George W., 2011. "Learning as a Rational Foundation for Macroeconomics and Finance," CEPR Discussion Papers 8340, C.E.P.R. Discussion Papers.
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    Cited by:

    1. repec:zbw:bofrdp:2016_021 is not listed on IDEAS
    2. Crowley, Patrick M. & Hudgins, David, 2015. "Euro area monetary and fiscal policy tracking design in the time-frequency domain," Research Discussion Papers 12/2015, Bank of Finland.
    3. Crowley, Patrick M. & Hudgins, David, 2016. "Analysis of the balance between U.S. monetary and fiscal policy using simulated wavelet-based optimal tracking control," Bank of Finland Research Discussion Papers 21/2016, Bank of Finland.
    4. Patrick M. Crowley & David Hudgins, 2018. "What is the right balance between US monetary and fiscal policy? Explorations using simulated wavelet-based optimal tracking control," Empirical Economics, Springer, vol. 55(4), pages 1537-1568, December.
    5. Crowley, Patrick M. & Hudgins, David, 2016. "Analysis of the balance between U.S. monetary and fiscal policy using simulated wavelet-based optimal tracking control," Research Discussion Papers 21/2016, Bank of Finland.
    6. Wen-Yi Chen & Yai-Wun Liang & Yu-Hui Lin, 2018. "Does Health Spending Crowd out Defense in the United States? Evidence from Wavelet Multiresolution Analysis," Defence and Peace Economics, Taylor & Francis Journals, vol. 29(7), pages 780-793, November.
    7. Crowley, Patrick M. & Hughes Hallett, Andrew, 2015. "Great moderation or “Will o’ the Wisp”? A time–frequency decomposition of GDP for the US and UK," Journal of Macroeconomics, Elsevier, vol. 44(C), pages 82-97.
    8. Vassilios Babalos & Guglielmo Maria Caporale & Nicola Spagnolo, 2021. "Equity fund flows and stock market returns in the USA before and after the global financial crisis: a VAR-GARCH-in-mean analysis," Empirical Economics, Springer, vol. 60(2), pages 539-555, February.
    9. Crowley, Patrick M. & Hudgins, David, 2015. "Fiscal policy tracking design in the time–frequency domain using wavelet analysis," Economic Modelling, Elsevier, vol. 51(C), pages 502-514.
    10. repec:zbw:bofrdp:2015_012 is not listed on IDEAS
    11. repec:zbw:bofrdp:urn:nbn:fi:bof-201508131350 is not listed on IDEAS
    12. Crowley, Patrick M. & Hudgins, David, 2017. "Wavelet-based monetary and fiscal policy in the Euro area," Journal of Policy Modeling, Elsevier, vol. 39(2), pages 206-231.
    13. repec:bof:bofrdp:urn:nbn:fi:bof-201508131350 is not listed on IDEAS
    14. Fousekis, Panos & Grigoriadis, Vasilis, 2016. "Spatial price dependence by time scale: Empirical evidence from the international butter markets," Economic Modelling, Elsevier, vol. 54(C), pages 195-204.

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