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

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  • Oleg Korenok

    () (Rutgers University)

  • Stanislav Radchenko

    () (University of North Carolina at Charlotte)

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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Bibliographic Info

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
Date of revision:
Handle: RePEc:rut:rutres:200413

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Keywords: volatility decline; great moderation; transitory shocks; asymmetry; factor models;

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References

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Cited by:
  1. Bilgili, Faik, 2007. "The Permanent and Transitory Effects on Consumption and Income: Evidence from the Turkish Economy," MPRA Paper 24090, University Library of Munich, Germany, revised 20 Jul 2010.
  2. Zaghini, Andrea & Bencivelli, Lorenzo, 2012. "Financial innovation, macroeconomic volatility and the great moderation," MPRA Paper 41263, University Library of Munich, Germany.
  3. 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.

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