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Stochastic trends and economic fluctuations

Author

Listed:
  • Robert G. King
  • Charles I. Plosser
  • James H. Stock
  • Mark W. Watson

Abstract

Are business cycles mainly the result of permanent shocks to productivity? This paper uses a long-run restriction implied by a large class of real-business-cycle models--identifying permanent productivity shocks as shocks to the common stochastic trend in output, consumption, and investment--to provide new evidence on this question. Econometric tests indicate that this common-stochastic-trend/cointegration implication is consistent with postwar U.S. data. However, in systems with nominal variables, the estimates of this common stochastic trend indicate that permanent productivity shocks typically explain less than half of the business-cycle variability in output, consumption, and investment. Copyright 1991 by American Economic Association.
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Suggested Citation

  • Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1991. "Stochastic trends and economic fluctuations," Working Paper Series, Macroeconomic Issues 91-4, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhma:91-4
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    References listed on IDEAS

    as
    1. Runkle, David E, 1987. "Vector Autoregressions and Reality," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(4), pages 437-442, October.
    2. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
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