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What Do We Learn from Unit Roots in Macroeconomic Time Series?

  • Danny Quah

It is often argued that the presence of a unit root in aggregate output implies that there is no "business cycle": the economy does not return to trend following a disturbance. This paper makes this notion precise, but then develops a simple aggregative model where this relation is contradicted. In the model output both has a unit root, and displays repeated short-run fluctuations around a deterministic trend. Some summary statistical evidence is presented that suggests the phenomena described in the paper is not without empirical basis.

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Paper provided by Massachusetts Institute of Technology (MIT), Department of Economics in its series Working papers with number 469.

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Date of creation: Oct 1987
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Handle: RePEc:mit:worpap:469
Contact details of provider: Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), DEPARTMENT OF ECONOMICS, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA
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  1. Steven N. Durlauf & Peter C.B. Phillips, 1986. "Trends Versus Random Walks in Time Series Analysis," Cowles Foundation Discussion Papers 788, Cowles Foundation for Research in Economics, Yale University.
  2. J. Bradford De Long & Lawrence H. Summers, 1984. "Are Business Cycles Symmetric?," NBER Working Papers 1444, National Bureau of Economic Research, Inc.
  3. 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 357-84, March.
  4. Francis X. Diebold & Glenn D. Rudebusch, 1987. "Does the business cycle have duration memory?," Special Studies Papers 223, Board of Governors of the Federal Reserve System (U.S.).
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