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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. King, Robert G. & Plosser, Charles I. & Stock, James H. & Watson, Mark W., 1991. "Stochastic Trends and Economic Fluctuations," American Economic Review, American Economic Association, vol. 81(4), pages 819-40, September.
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  8. Greenwood, Jeremy & Hercowitz, Zvi & Krusell, Per, 2000. "The role of investment-specific technological change in the business cycle," European Economic Review, Elsevier, vol. 44(1), pages 91-115, January.
  9. Chang-Jin Kim & Jeremy M. Piger, 2001. "Common stochastic trends, common cycles, and asymmetry in economic fluctuations," Working Papers 2001-014, Federal Reserve Bank of St. Louis.
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  15. Rotemberg, Julio J & Woodford, Michael, 1996. "Real-Business-Cycle Models and the Forecastable Movements in Output, Hours, and Consumption," American Economic Review, American Economic Association, vol. 86(1), pages 71-89, March.
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Cited by:
  1. Peter N. Ireland & Scott Schuh, 2006. "Productivity and U.S. Macroeconomic Performance: Interpreting the Past and Predicting the Future with a Two-Sector Real Business Cycle Model," Boston College Working Papers in Economics 642, Boston College Department of Economics.
  2. Lavan Mahadeva & Juan Carlos Parra Alvarez, . "Testing a DSGE model and its partner database," Borradores de Economia 479, Banco de la Republica de Colombia.
  3. Mehdi Senouci, 2012. "Technical change in a neoclassical two-sector model of optimal growth," Working Papers halshs-00589627, HAL.
  4. M.S.Rafiq, 2006. "Great Ratios, Balanced Growth and Stochastic Trends: Evidence for the Euro Area," Discussion Paper Series 2006_20, Department of Economics, Loughborough University.
  5. Galí, Jordi, 2005. "Trends in Hours, Balanced Growth and the Role of Technology in the Business Cycle," CEPR Discussion Papers 4915, C.E.P.R. Discussion Papers.
  6. M.S.Rafiq, 2006. "Business Cycle Moderation - Good Policies or Good Luck: Evidence and Explanations for the Euro Area," Discussion Paper Series 2006_21, Department of Economics, Loughborough University.
  7. 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.

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