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The Role of Permanent and Transitory Components in Business Cycle Volatility Moderation

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Author Info
Oleg Korenok () (Rutgers University)
Stanislav Radchenko () (University of North Carolina at Charlotte)

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Abstract

The paper examines the processes underlying economic fluctuations by investigating the volatility moderation of U.S. economy in the early 1980's. We decompose the volatility decline using a dynamic factor framework into a common stochastic trend, common transitory component and idiosyncratic components. We find that the moderation of business cycle was a result of the moderation in transitory and idiosyncratic components. Our results suggest that important part of stochastic process that drives economy is transitory. The paper investigates the role of oil prices, monetary and financial market factors. Proposed economic factors do not have a significant relationship to either transitory or permanent components. In addition, we find that transitory shocks are as common during the 80's and 90's as they were during the 60's and 70's.

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Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 200413.

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Length: 20 pages
Date of creation: 04 Jun 2004
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Handle: RePEc:rut:rutres:200413

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Related research
Keywords: volatility decline great moderation transitory shocks asymmetry factor models

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Find related papers by JEL classification:
C5 - Mathematical and Quantitative Methods - - Econometric Modeling
E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Siem Jan Koopman & Soon Yip Wong, 2006. "Extracting Business Cycles using Semi-parametric Time-varying Spectra with Applications to US Macroeconomic Time Series," Tinbergen Institute Discussion Papers 06-105/4, Tinbergen Institute. [Downloadable!]
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