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Temporary cycles or volatile trends? Economic fluctuations in 21 OECD economies

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  • Gabriel Sterne
  • Tamim Bayoumi

Abstract

Whether it is feasible to use various types of economic policy measures to reduce fluctuations in economic activity will depend on the source of the fluctuations. In particular, policy should respond in different ways to transitory disturbances to aggregate demand and more permanent shifts in aggregate supply. The paper uses small structural var autoregressions to distinguish between these two types of disturbances. The models utilise price and output data in each of 21 OECD economies. The results indicate the supply and demand disturbances are of roughly equal importance in explaining fluctuations in growth and inflation across this wide range of economies. This supports the view that economic fluctuations cannot be characterised as a cyclical changes around a fixed trend (the Keynesian synthesis) or as continual movements in underlying supply potential (a view of real business cycle theorists). Rather, they are an amalgam of both effects. Amongst the G7 economies, demand shocks have the greatest effect on output in the UK and US, and weakest in Japan and Germany. These results support the general view of activeness of government policy in these countries and provide little evidence of successful stabilisation. A method of distinguishing the effects of output and inflation on each type of disturbance is then outlined. This makes it possible to measure 'supply potential' for each economy; there is evidence of a steady decline in the rate of increase in supply potential over time, a view consistent with the 'catch up' theory of post-war economic growth.

Suggested Citation

  • Gabriel Sterne & Tamim Bayoumi, 1993. "Temporary cycles or volatile trends? Economic fluctuations in 21 OECD economies," Bank of England working papers 13, Bank of England.
  • Handle: RePEc:boe:boeewp:13
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    References listed on IDEAS

    as
    1. Andrew Derry & Mahmood Pradhan, 1993. "Tax Specific Term Structures of Interest Rates in the UK Government Bond Market," Bank of England working papers 11, Bank of England.
    2. Bayoumi, Tamim, 1993. "Financial Deregulation and Household Saving," Economic Journal, Royal Economic Society, vol. 103(421), pages 1432-1443, November.
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    Cited by:

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    2. Charles St-Arnaud, 2004. "Une approche éclectique d'estimation du PIB potentiel pour le Royaume-Uni," Staff Working Papers 04-46, Bank of Canada.
    3. Jan Gottschalk & Willem Van Zandweghe, 2003. "Do Bivariate SVAR Models with Long-Run Identifying Restrictions Yield Reliable Results? An Investigation into the Case of Germany," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 139(I), pages 55-81, March.
    4. Dopke, Jorg, 2001. "Macroeconomic forecasts and the nature of economic shocks in Germany," International Journal of Forecasting, Elsevier, vol. 17(2), pages 181-201.
    5. Francis Breedon & Ian Twinn, 1995. "Valuation of underwriting agreements for UK rights issues: evidence from the traded option market," Bank of England working papers 39, Bank of England.
    6. Mark S Astley & Andrew G Haldane, 1995. "Money as an Indicator," Bank of England working papers 35, Bank of England.
    7. ODIA NDONGO, Yves Francis, 2007. "Les sources des fluctuations marcoéconomiques au Cameroun," MPRA Paper 1308, University Library of Munich, Germany.
    8. Funke, Michael, 1997. "Supply potential and output gaps in West German manufacturing," International Journal of Forecasting, Elsevier, vol. 13(2), pages 211-222, June.
    9. Alejandro D. Jacobo, 2002. "Taking the business cycle´s pulse to some Latin American economies: Is there a rhythmical beat?," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 17(2), pages 219-245.
    10. Attfield, Clifford L. F. & Silverstone, Brian, 1998. "Okun's Law, Cointegration and Gap Variables," Journal of Macroeconomics, Elsevier, vol. 20(3), pages 625-637, July.
    11. Jörg Döpke & Christian Pierdzioch, 2000. "Stock Market Dispersion, Sectoral Shocks, and the German Business Cycle," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 136(IV), pages 531-555, December.
    12. jose ramos pires manso, 2004. "Economical Versus Political Cycles In An Iberian Manufacturing Sector," Industrial Organization 0404003, University Library of Munich, Germany.
    13. Louis, Rosmy & Osman, Mohammad & Balli, FAruk, 2007. "On The Road to Monetary Union – Do Arab Gulf Cooperation Council Economies React in the same way to United States' Monetary Policy Shocks?," MPRA Paper 11610, University Library of Munich, Germany, revised Nov 2008.
    14. Marco Bianchi, 1995. "Testing for convergence: evidence from non-parametric multimodality tests," Bank of England working papers 36, Bank of England.
    15. van Zandweghe, Willem & Gottschalk, Jan, 2001. "Do Bivariate SVAR Models with Long-Run Identifying Restrictions Yield Reliable Results? The Case of Germany," Kiel Working Papers 1068, Kiel Institute for the World Economy (IfW Kiel).
    16. Francis Breedon, 1996. "Why do the LIFFE and DTB bund futures contracts trade at different prices?," Bank of England working papers 57, Bank of England.
    17. Mark S Astley & Tony Yates, 1999. "Inflation and real disequilibria," Bank of England working papers 103, Bank of England.
    18. Ewa Wrobel & Malgorzata Pawlowska, 2002. "Monetary transmission in Poland: some evidence on interest rate and credit channels," NBP Working Papers 24, Narodowy Bank Polski.

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