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The Cyclical Dynamics and Volatility of Australian Output and Employment

  • Robert Dixon
  • David Shepherd

In this paper we examine the volatility of aggregate output and employment in Australia with the aid of a frequency filtering method (the Butterworth filter) that allows each time series to be decomposed into trend, cycle and noise components. This analysis is compared with more traditional methods based simply on the examination of first differences in the logs of the raw data using cointegration-VAR modelling. We show that the application of univariate AR and bivariate VECM methods to the data results in a detrended series which is dominated by noise rather than cyclical variation and gives break points which are not robust to alternative decomposition methods. Also, our conclusions challenge accepted wisdom in relation to output volatility in Australia which holds that there was a once and for all sustained reduction in output volatility in or around 1984. We do not find any convincing evidence for a sustained reduction in the cyclical volatility of the GDP (or employment) series at that time, but we do find evidence of a sustained reduction in the cyclical volatility of the GDP (and employment) series in 1993/4. We also find that there is a clear association between output volatility and employment volatility. We discuss the key features of the business cycle we have identified as well as some of the policy implications of our results.

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Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 968.

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Length: 51 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:mlb:wpaper:968
Contact details of provider: Postal: Department of Economics, The University of Melbourne, 4th Floor, FBE Building, Level 4, 111 Barry Street. Victoria, 3010, Australia
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Web page: http://www.economics.unimelb.edu.au
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  17. Gomez, Victor, 2001. "The Use of Butterworth Filters for Trend and Cycle Estimation in Economic Time Series," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(3), pages 365-73, July.
  18. Robert Dixon & G.C. Lim, 2004. "Underlying Inflation in Australia: Are the Existing Measures Satisfactory?," The Economic Record, The Economic Society of Australia, vol. 80(251), pages 373-386, December.
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  24. Harvey, A.C. & Trimbur, T.M., 2001. "General Model-based Filters for Extracting Cycles and Trends in Economic Time Series," Cambridge Working Papers in Economics 0113, Faculty of Economics, University of Cambridge.
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  27. Taylor, Andrew & Shepherd, David & Duncan, Stephen, 2005. "The structure of the Australian growth process: A Bayesian model selection view of Markov switching," Economic Modelling, Elsevier, vol. 22(4), pages 628-645, July.
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