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

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  • Joseph G. Haubrich
  • Andrew W. Lo

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 5-89.

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Handle: RePEc:fth:pennfi:5-89

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  1. Stock, James H. & Watson, Mark W., 1986. "Does GNP have a unit root?," Economics Letters, Elsevier, vol. 22(2-3), pages 147-151.
  2. Nelson, Charles R & Kang, Heejoon, 1981. "Spurious Periodicity in Inappropriately Detrended Time Series," Econometrica, Econometric Society, Econometric Society, vol. 49(3), pages 741-51, May.
  3. 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.
  4. Peter C.B. Phillips, 1985. "Time Series Regression with a Unit Root," Cowles Foundation Discussion Papers 740R, Cowles Foundation for Research in Economics, Yale University, revised Feb 1986.
  5. King, Robert G & Plosser, Charles I & Rebelo, Sergio T, 2002. "Production, Growth and Business Cycles: Technical Appendix," Computational Economics, Society for Computational Economics, vol. 20(1-2), pages 87-116, October.
  6. Lo, Andrew W, 1991. "Long-Term Memory in Stock Market Prices," Econometrica, Econometric Society, Econometric Society, vol. 59(5), pages 1279-313, September.
  7. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(1), pages 39-69, February.
  8. Jeremy Greenwood & Gregory W. Huffman, 1991. "Tax analysis in a real business cycle model: on measuring Harberger triangles and Okun gaps," Staff Report, Federal Reserve Bank of Minneapolis 138, Federal Reserve Bank of Minneapolis.
  9. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  10. Baxter, M., 1988. "Approximating Suboptimal Dynamic Equilibria: An Euler Equation Approach," RCER Working Papers 139, University of Rochester - Center for Economic Research (RCER).
  11. Francis X. Diebold & Glenn D. Rudebusch, 1988. "Long memory and persistence in aggregate output," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 7, Board of Governors of the Federal Reserve System (U.S.).
  12. 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.
  13. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(5), pages 893-920, October.
  14. 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.
  15. John Y. Campbell & N. Gregory Mankiw, 1986. "Are Output Fluctuations Transitory?," NBER Working Papers 1916, National Bureau of Economic Research, Inc.
  16. Perron, Pierre & Phillips, Peter C. B., 1987. "Does GNP have a unit root? : A re-evaluation," Economics Letters, Elsevier, vol. 23(2), pages 139-145.
  17. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
  18. 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.
  19. Sowell, F., 1989. "The Deterministic Trend In Real Gnp," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 88-89-60, Carnegie Mellon University, Tepper School of Business.
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