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The Sources and Nature of Long-Term Memory in the Business Cycle

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Author Info
Joseph G. Haubrich
Andrew W. Lo

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Abstract

This paper examines the stochastic properties of aggregate macroeconomic time series from the standpoint of fractionally integrated models, and focuses on the persistence of economic shocks. We develop a simple macroeconomic model that exhibits long-term dependence, a consequence of aggregation in the presence of real business cycles. We derive the re-lation between properties of fractionally integrated macroeconomic time series and those of microeconomic data, and discuss how fiscal policy may alter their stochastic behavior. To implement these results empirically, we employ a test for fractionally integrated time series based on the Hurst-Mandelbrot rescaled range. This test is robust to short-term dependence, and is applied to quarterly and annual real GNP to determine the sources and nature of long-term dependence in the business cycle.

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Paper provided by Wharton School Rodney L. White Center for Financial Research in its series Rodney L. White Center for Financial Research Working Papers with number 05-89.

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Handle: RePEc:fth:pennfi:05-89

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  1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October. [Downloadable!] (restricted)
  2. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May. [Downloadable!] (restricted)
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  3. Diebold, Francis X. & Rudebusch, Glenn D., 1989. "Long memory and persistence in aggregate output," Journal of Monetary Economics, Elsevier, vol. 24(2), pages 189-209, September. [Downloadable!] (restricted)
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  4. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February. [Downloadable!] (restricted)
  5. Beveridge, Stephen & Nelson, Charles R., 1981. "A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the `business cycle'," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 151-174. [Downloadable!] (restricted)
  6. Danny Quah, 1987. "What Do We Learn from Unit Roots in Macroeconomic Time Series?," Working papers 469, Massachusetts Institute of Technology (MIT), Department of Economics.
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  7. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March. [Downloadable!] (restricted)
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  8. Campbell, John Y & Mankiw, N Gregory, 1987. "Are Output Fluctuations Transitory?," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 857-80, November. [Downloadable!] (restricted)
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  9. Stock, James H. & Watson, Mark W., 1986. "Does GNP have a unit root?," Economics Letters, Elsevier, vol. 22(2-3), pages 147-151. [Downloadable!] (restricted)
  10. Nelson, Charles R & Kang, Heejoon, 1981. "Spurious Periodicity in Inappropriately Detrended Time Series," Econometrica, Econometric Society, vol. 49(3), pages 741-51, May. [Downloadable!] (restricted)
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  11. Greenwood, J. & Huffman, G., 1991. "Tax Analysis in A Real Business Cycle Model: On Measuring Harberger Triangles and Okun Gaps," UWO Department of Economics Working Papers 9103, University of Western Ontario, Department of Economics.
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  12. Baxter, M., 1988. "Approximating Suboptimal Dynamic Equilibria: An Euler Equation Approach," RCER Working Papers 139, University of Rochester - Center for Economic Research (RCER).
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  13. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October. [Downloadable!] (restricted)
  14. Granger, C. W. J., 1980. "Long memory relationships and the aggregation of dynamic models," Journal of Econometrics, Elsevier, vol. 14(2), pages 227-238, October. [Downloadable!] (restricted)
  15. Sowell, F., 1989. "The Deterministic Trend In Real Gnp," GSIA Working Papers 88-89-60, Carnegie Mellon University, Tepper School of Business.
  16. Lo, Andrew W, 1991. "Long-Term Memory in Stock Market Prices," Econometrica, Econometric Society, vol. 59(5), pages 1279-313, September. [Downloadable!] (restricted)
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  17. Singleton, Kenneth J., 1988. "Econometric issues in the analysis of equilibrium business cycle models," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 361-386. [Downloadable!] (restricted)
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  2. Kenneth D. West & Dongchul Cho, 1994. "The Predictive Ability of Several Models of Exchange Rate Volatility," NBER Technical Working Papers 0152, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. B. Verspagen & G. Silverberg, 2000. "A note on Michelacci and Zaffaroni, long memory, and time series of economic growth," ECIS Working Papers 00.17, Eindhoven Centre for Innovation Studies, Eindhoven University of Technology. [Downloadable!]
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  4. Silverberg, G. & Verspagen, Bart, 1999. "Long Memory in Time Series of Economic Growth and Convergence," ECIS Working Papers 99.8, Eindhoven Centre for Innovation Studies, Eindhoven University of Technology. [Downloadable!]
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  5. Adrian R. Pagan & G. William Schwert, 1990. "Alternative Models For Conditional Stock Volatility," NBER Working Papers 2955, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Marco Lippi & Paolo Zaffaroni, 1998. "Aggregation of Simple Linear Dynamics: Exact Asymptotic Results," STICERD - Econometrics Paper Series /1998/350, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE. [Downloadable!]
  7. Peter C.B. Phillips & Mico Loretan, 1990. "Testing Covariance Stationarity Under Moment Condition Failure with an Application to Common Stock Returns," Cowles Foundation Discussion Papers 947, Cowles Foundation, Yale University. [Downloadable!]
  8. Joseph G. Haubrich, 1990. "Consumption and fractional differencing: old and new anomalies," Working Paper 9010, Federal Reserve Bank of Cleveland. [Downloadable!]
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  9. Ana Pérez & Esther Ruiz, 2001. "Modelos De Memoria Larga Para Series Económicas Y Financieras," Documentos de Trabajo de Estadística y Econometría ds010101, Universidad Carlos III, Departamento de Estadística y Econometría. [Downloadable!]
  10. David K. Backus & Stanley E. Zin, 1993. "Long-memory Inflation Uncertainty: Evidence from the Term Structure of Interest Rates," NBER Technical Working Papers 0133, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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