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The role of permanent and transitory components in business cycle volatility moderation

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  • Stan Radchenko
  • Oleg Korenok

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 Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 149.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:149
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Keywords: volatility decline; volatility decline; 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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Cited by:

  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.
  2. Oleg Korenok & Stanislav Radchenko, 2004. "Monetary Policy Effect on the Business Cycle Fluctuations: Output vs. Index Measures of the Cycle," Macroeconomics 0409015, EconWPA, revised 20 Sep 2004.
  3. Zaghini, Andrea & Bencivelli, Lorenzo, 2012. "Financial innovation, macroeconomic volatility and the great moderation," MPRA Paper 41263, University Library of Munich, Germany.
  4. 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.

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