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The great moderation under the microscope: decomposition of macroeconomic cycles in US and UK aggregate demand

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Author Info

  • Crowley , Patrick M

    ()
    (College of Business, Texas A&M University)

  • Hughes Hallett, Andrew

    (George Mason University – School of Public Policy)

Abstract

In this paper the relationship between the growth of real GDP components is explored in the frequency domain using both static and dynamic wavelet analysis. This analysis is carried out separately for the US and UK using quarterly data, and the results are found to be substantially different for the two countries. One of the key findings of this research is that the ‘great moderation’ shows up only at certain frequencies, and not in all components of real GDP. We use these results to explain why the incidence of the great moderation has been so patchy across GDP components, countries and time periods. This also explains why it has been so hard to detect periods of moderation (or other periods) reliably in the aggregate data. We argue this cannot be done without separating the GDP components into their frequency components over time. Our results show why: the predictions of traditional real business cycle theory often appear not to be upheld in the data.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/BoF_DP_1113.pdf
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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 13/2011.

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Length: 37 pages
Date of creation: 23 May 2011
Date of revision:
Handle: RePEc:hhs:bofrdp:2011_013

Contact details of provider:
Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Related research

Keywords: business cycles; growth cycles; discrete wavelet analysis; US real GDP; UK real GDP;

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References

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  1. Fang, Yiwei & Hasan, Iftekhar & Marton, Katherin, 2011. "Bank efficiency in transition economies: recent evidence from South-Eastern Europe," Research Discussion Papers 5/2011, Bank of Finland.
  2. Fang , Yiwei & Hasan, Iftekhar & Marton, Katherin, 2011. "Market reforms, legal changes and bank risk-taking – evidence from transition economies," Research Discussion Papers 7/2011, Bank of Finland.
  3. Andrea Colciago & Lorenza Rossi, 2011. "Endogenous Market Structures and Labor Market Dynamics," Quaderni di Dipartimento 139, University of Pavia, Department of Economics and Quantitative Methods, revised Feb 2011.
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Cited by:
  1. Paloviita, Maritta & Kinnunen, Helvi, 2011. "Real time analysis of euro area fiscal policies: adjustment to the crisis," Research Discussion Papers 21/2011, Bank of Finland.
  2. Rhys Bidder, 2013. "Frequency shifting," Working Paper Series 2013-29, Federal Reserve Bank of San Francisco.

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