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Output Fluctuations Persistence: Do Cyclical Shocks Matter?

Listed author(s):
  • Silvestro Di Sanzo

The aim of this paper is to identify the different sources of persistence of output fluctuations. We propose an unobserved components model that allows us to decompose GDP series into a trend component and a cyclical component. We let the drift of the trend component to switch between different regimes according to a first-order Markov process. To calculate an appropriate p-value for a test of linearity we propose a bootstrap procedure, which allows for general forms of heteroskedasticity. The performance of the bootstrap is checked by means of a Monte Carlo simulation. Our study concerns the U.S. As suggested by the Endogenous Growth theory, cyclical shocks appear to play an important role on the observed persistence of output. We argue that the traditional explanation of persistence, which is related to Real Business Cycle models with exogenous productivity, is not consistent with our data. We also find that the majority of business cycle fluctuations in the U.S. are due to real shocks.

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Article provided by Wiley Blackwell in its journal Bulletin of Economic Research.

Volume (Year): 63 (2011)
Issue (Month): 1 (01)
Pages: 28-52

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Handle: RePEc:bla:buecrs:v:63:y:2011:i:1:p:28-52
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References listed on IDEAS
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  1. Chang-Jin Kim & Chris Murray, 1999. "Permanent and Transitory Nature of Recessions," Working Papers 0041, University of Washington, Department of Economics.
  2. Chang-Jin Kim & Jeremy Piger, 2000. "Common Stochastic Trends, Common Cycles, and Asymmetry in Economic Fluctuations," Working Papers 0021, University of Washington, Department of Economics.
  3. Sergio Rebelo, 2005. "Real Business Cycle Models: Past, Present, and Future," NBER Working Papers 11401, National Bureau of Economic Research, Inc.
  4. Cogley, T., 1989. "International Evidence On The Size Of The Random Walk In Output," Working Papers 89-02, University of Washington, Department of Economics.
  5. Hansen, B.E., 1991. "Inference when a Nuisance Parameter is Not Identified Under the Null Hypothesis," RCER Working Papers 296, University of Rochester - Center for Economic Research (RCER).
  6. Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1987. "Stochastic Trends and Economic Fluctuations," NBER Working Papers 2229, National Bureau of Economic Research, Inc.
  7. Kim, C-J., 1991. "Dynamic Linear Models with Markov-Switching," Papers 91-8, York (Canada) - Department of Economics.
  8. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
  9. Hansen, Bruce E, 1992. "The Likelihood Ratio Test under Nonstandard Conditions: Testing the Markov Switching Model of GNP," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages 61-82, Suppl. De.
  10. Fatas, Antonio, 2000. "Endogenous growth and stochastic trends," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 107-128, February.
  11. Campbell, John & Mankiw, Gregory, 1987. "Are Output Fluctuations Transitory?," Scholarly Articles 3122545, Harvard University Department of Economics.
  12. Jaeger, Albert & Parkinson, Martin, 1994. "Some evidence on hysteresis in unemployment rates," European Economic Review, Elsevier, vol. 38(2), pages 329-342, February.
  13. René Garcia, 1995. "Asymptotic Null Distribution of the Likelihood Ratio Test in Markov Switching Models," CIRANO Working Papers 95s-07, CIRANO.
  14. Stadler, George W, 1990. "Business Cycle Models with Endogenous Technology," American Economic Review, American Economic Association, vol. 80(4), pages 763-778, September.
  15. Hansen, Bruce E., 2000. "Testing for structural change in conditional models," Journal of Econometrics, Elsevier, vol. 97(1), pages 93-115, July.
  16. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : II. New directions," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 309-341.
  17. Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers 1015, Cowles Foundation for Research in Economics, Yale University.
  18. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
  19. Chang-Jin Kim & Christian J. Murray, 2002. "Permanent and transitory components of recessions," Empirical Economics, Springer, vol. 27(2), pages 163-183.
  20. Peter K. Clark, 1987. "The Cyclical Component of U. S. Economic Activity," The Quarterly Journal of Economics, Oxford University Press, vol. 102(4), pages 797-814.
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