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Measuring business cycles by saving for a rainy day

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  • Mario J. Crucini
  • Mototsugu Shintani

Abstract

We propose a simple saving-based measure of the cyclical component in GDP. The measure is motivated by the prediction that the representative consumer changes savings in response to temporary deviations of income from its stochastic trend, while satisfying a present-value budget constraint. To evaluate our procedure, we employ the bivariate error correction model of Cochrane (1994) to the member countries of the G-7 and Australia. Our estimates reveal, that to a close approximation, the stochastic trend component of GDP is consumption and the transitory component is the error correction term, which justifies the use of our saving-based measure.

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Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 50.

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Date of creation: 2010
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Handle: RePEc:fip:feddgw:50

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Keywords: Business cycles ; Saving and investment ; Gross domestic product ; Consumer behavior;

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  1. Ravn, Morten O, 1997. "Permanent and Transitory Shocks, and the UK Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 12(1), pages 27-48, Jan.-Feb..
  2. Ogaki, Masao & Park, Joon Y., 1997. "A cointegration approach to estimating preference parameters," Journal of Econometrics, Elsevier, Elsevier, vol. 82(1), pages 107-134.
  3. James Morley & Charles Nelson & Eric Zivot, 2002. "Why Are Beveridge-Nelson and Unobserved-Component Decompositions of GDP So Different?," Working Papers, University of Washington, Department of Economics UWEC-2002-01, University of Washington, Department of Economics.
  4. Shintani Mototsugu, 1994. "Cointegration and Tests of the Permanent Income Hypothesis: Japanese Evidence with International Comparisons," Journal of the Japanese and International Economies, Elsevier, vol. 8(2), pages 144-172, June.
  5. George Evans & Lucrezia Reichlin, 1994. "Information, forecasts and measurement of the business cycle," ULB Institutional Repository 2013/10155, ULB -- Universite Libre de Bruxelles.
  6. Cogley, Timothy & Nason, James M., 1995. "Effects of the Hodrick-Prescott filter on trend and difference stationary time series Implications for business cycle research," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 19(1-2), pages 253-278.
  7. James C. Morley & Charles R. Nelson & Eric Zivot, 2003. "Why Are the Beveridge-Nelson and Unobserved-Components Decompositions of GDP So Different?," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 235-243, May.
  8. repec:ubc:bricol:92-23 is not listed on IDEAS
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  1. Measuring business cycles by saving for a rainy day
    by Christian Zimmermann in NEP-DGE blog on 2010-07-28 14:07:39

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