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Output Fluctuations in the G-7: An Unobserved Components Approach

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  • Tara Sinclair

    ()
    (Department of Economics/Institute for International Economic Policy, George Washington University)

  • Sinchan Mitra

    ()
    (School of Economics, University of Queensland/ Discover Financial Services)

Abstract

This paper contributes to the debate about the relative importance of permanent versus transitory disturbances as sources of variation in output across the G-7 countries. We employ a multivariate unobserved components model to simultaneously decompose the real GDP for each of the G-7 countries into their respective permanent and transitory components. In contrast to much of the related literature, our model allows for explicit interaction between the components both within and across series. This approach thus allows us to distinguish cross-country correlations driven by the relationships between permanent innovations from those between transitory movements. We find that fluctuations in output are primarily due to permanent movements for all of the G-7 countries. We also find that the correlation between the permanent and transitory innovations within each series is significantly negative. With regards to cross- country relationships, we find important idiosyncratic variation in the correlation across different country pairs.

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Bibliographic Info

Paper provided by The George Washington University, Institute for International Economic Policy in its series Working Papers with number 2008-04.

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Length: 33 pages
Date of creation: May 2008
Date of revision:
Handle: RePEc:gwi:wpaper:2008-04

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Keywords: Permanent-Transitory Decompositions; Business Cycles; Correlations; Real GDP;

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Cited by:
  1. James Morley & Irina B. Panovska & Tara M. Sinclair, 2013. "Testing Stationarity for Unobserved Components Models," Discussion Papers 2012-41A, School of Economics, The University of New South Wales.

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