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New Evidence on Balanced Growth, Stochastic Trends, and Economic Fluctuations

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  • Whelan, Karl

Abstract

The one-sector Solow-Ramsey growth model informs how most modern researchers characterize macroeconomic trends and cycles, and evidence supporting the model's balanced growth predictions is often cited. This paper shows, however, that the inclusion of recent data leads to the balanced growth predictions being rejected. An alternative balanced growth hypothesis---that the ratio of nominal consumption to nominal investment is stationary---is put forward, and new measures of the stochastic trends and cycles in aggregate US data are derived based on this hypothesis. The contrasting behavior of real and nominal ratios is consistent with a two-sector model of economic growth, with separate production technologies for consumption and investment and two stochastic trends underlying the long-run behavior of all macroeconomic series. Empirical estimates of these stochastic trends are presented based on a structural VAR and the role played in the business cycle by shocks to these trends is discussed.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 5910.

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Date of creation: Jun 2006
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Handle: RePEc:pra:mprapa:5910

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Keywords: Balanced Growth; Technology Shocks; Two-Sector Models;

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  1. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, Econometric Society, vol. 69(6), pages 1519-1554, November.
  2. Graham Elliott & Thomas J. Rothenberg & James H. Stock, 1992. "Efficient Tests for an Autoregressive Unit Root," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0130, National Bureau of Economic Research, Inc.
  3. Lawrence Slifman & Carol Corrado, 1999. "Decomposition of Productivity and Unit Costs," American Economic Review, American Economic Association, American Economic Association, vol. 89(2), pages 328-332, May.
  4. Charles I. Jones, 2005. "The Shape of Production Functions and the Direction of Technical Change," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 120(2), pages 517-549, May.
  5. Greenwood, Jeremy & Hercowitz, Zvi & Krusell, Per, 1997. "Long-Run Implications of Investment-Specific Technological Change," American Economic Review, American Economic Association, American Economic Association, vol. 87(3), pages 342-62, June.
  6. Fama, Eugene F., 1992. "Transitory variation in investment and output," Journal of Monetary Economics, Elsevier, Elsevier, vol. 30(3), pages 467-480, December.
  7. Greenwood, J. & Hercowitz, Z. & Krusell, P., 1998. "The Role of Investment-Specific Technological Change in the Business Cycle," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 449, University of Rochester - Center for Economic Research (RCER).
  8. Michael J. Boskin, 1998. "Consumer Prices, the Consumer Price Index, and the Cost of Living," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 12(1), pages 3-26, Winter.
  9. Chang-Jin Kim & Jeremy Piger, 2000. "Common stochastic trends, common cycles, and asymmetry in economic fluctuations," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 681, Board of Governors of the Federal Reserve System (U.S.).
  10. Whelan, Karl, 2003. " A Two-Sector Approach to Modeling U.S. NIPA Data," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 35(4), pages 627-56, August.
  11. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2003. "What happens after a technology shock?," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 768, Board of Governors of the Federal Reserve System (U.S.).
  12. Jonas D. M. Fisher, 2006. "The Dynamic Effects of Neutral and Investment-Specific Technology Shocks," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 114(3), pages 413-451, June.
  13. King, Robert G. & Plosser, Charles I. & Stock, James H. & Watson, Mark W., 1991. "Stochastic Trends and Economic Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 81(4), pages 819-40, September.
  14. Cochrane, John H, 1994. "Permanent and Transitory Components of GNP and Stock Prices," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(1), pages 241-65, February.
  15. Jordi Gali, 1996. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations," NBER Working Papers 5721, National Bureau of Economic Research, Inc.
  16. Whelan, Karl, 2002. "A Guide to U.S. Chain Aggregated NIPA Data," Review of Income and Wealth, International Association for Research in Income and Wealth, International Association for Research in Income and Wealth, vol. 48(2), pages 217-33, June.
  17. Rotemberg, Julio J & Woodford, Michael, 1996. "Real-Business-Cycle Models and the Forecastable Movements in Output, Hours, and Consumption," American Economic Review, American Economic Association, American Economic Association, vol. 86(1), pages 71-89, March.
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Cited by:
  1. M.S.Rafiq, 2006. "Business Cycle Moderation - Good Policies or Good Luck: Evidence and Explanations for the Euro Area," Discussion Paper Series, Department of Economics, Loughborough University 2006_21, Department of Economics, Loughborough University.
  2. Peter N. Ireland, 2008. "On the Welfare Cost of Inflation and the Recent Behavior of Money Demand," NBER Working Papers 14098, National Bureau of Economic Research, Inc.
  3. repec:hal:wpaper:halshs-00589627 is not listed on IDEAS
  4. Peter Ireland & Scott Schuh, 2008. "Productivity and U.S. Macroeconomic Performance: Interpreting the Past and Predicting the Future with a Two-Sector Real Business Cycle Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 473-492, July.
  5. Jordi Gali, 2005. "Trends in Hours, Balanced Growth, and the Role of Technology in the Business Cycle," NBER Working Papers 11130, National Bureau of Economic Research, Inc.
  6. Lavan Mahadeva & Juan Carlos Parra Alvarez, . "Testing a DSGE model and its partner database," Borradores de Economia 479, Banco de la Republica de Colombia.
  7. M.S.Rafiq, 2006. "Great Ratios, Balanced Growth and Stochastic Trends: Evidence for the Euro Area," Discussion Paper Series, Department of Economics, Loughborough University 2006_20, Department of Economics, Loughborough University.

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