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New Evidence on Balanced Growth, Stochastic Trends, and Economic Fluctations

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  • Whelan, Karl

    (Central Bank and Financial Services Authority of Ireland)

Abstract

The one-sector Solow-Ramsey model informs how most modern researchers characterize macroeconomic trends and cycles, and evidence supporting the model’s balanced growth predictions is often cited. This paper shows, however, that the inclusion of recent data leads to the balanced growth predictions being rejected. An alternative balanced growth hypothesis-that the ratio of nominal consumption to nominal investment is stationery-is put forward, and new measures of the stochastic trends and cycles in aggregate US data are derived based on this hypothesis. The contrasting behaviour of real and nominal ratios is consistent with a two-sector model of economic growth, with separate production technologies for consumption and investment and two stochastic trends underlying the long-run behaviour of all macroeconomic series. 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.

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Bibliographic Info

Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 7/RT/04.

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Length: 42 pages
Date of creation: Oct 2004
Date of revision:
Handle: RePEc:cbi:wpaper:7/rt/04

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  1. L. Slifman & C. Corrado, 1996. "Decomposition of productivity and unit costs," Staff Studies, Board of Governors of the Federal Reserve System (U.S.) 1, Board of Governors of the Federal Reserve System (U.S.).
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  5. Whelan, Karl, 2003. " A Two-Sector Approach to Modeling U.S. NIPA Data," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 35(4), pages 627-56, August.
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Cited by:
  1. Jordi Gali, 2005. "Trends in Hours, Balanced Growth, and the Role of Technology in the Business Cycle," NBER Working Papers 11130, National Bureau of Economic Research, Inc.
  2. Peter N. Ireland, 2008. "On the Welfare Cost of Inflation and the Recent Behavior of Money Demand," NBER Working Papers 14098, National Bureau of Economic Research, Inc.
  3. Peter N. Ireland & Scott Schuh, 2007. "Productivity and U.S. Macroeconomic Performance: Interpreting the Past and Predicting the Future with a Two-Sector Real Business Cycle Model," NBER Working Papers 13532, National Bureau of Economic Research, Inc.
  4. M.S.Rafiq, 2006. "Great Ratios, Balanced Growth and Stochastic Trends: Evidence for the Euro Area," Discussion Paper Series, Department of Economics, Loughborough University 2006_20, Department of Economics, Loughborough University.
  5. Lavan Mahadeva & Juan Carlos parra, 2008. "Testing a DSGE model and its partner database," BORRADORES DE ECONOMIA 004507, BANCO DE LA REPÚBLICA.
  6. M.S.Rafiq, 2006. "Business Cycle Moderation - Good Policies or Good Luck: Evidence and Explanations for the Euro Area," Discussion Paper Series, Department of Economics, Loughborough University 2006_21, Department of Economics, Loughborough University.
  7. repec:hal:wpaper:halshs-00589627 is not listed on IDEAS

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