Common Trends and Common Cycles in Canadian Sectoral Output

This paper examines evidence of long- and short-run co-movement in Canadian sectoral output data. Our framework builds on a vector-error-correction representation that allows to test for and compute full-information maximum-likelihood estimates of models with codependent cycle restrictions. We find that the seven sectors under consideration contain five common trends and five codependent cycles and use their estimates to obtain a multivariate Beveridge-Nelson decomposition to isolate and compare the common components. A forecast error variance decomposition indicates that some sectors, such as manufacturing and construction, are subject to persistent transitory shocks, whereas other sectors, such as financial services, are not. We also find that imposing common feature restrictions leads to a non-trivial gain in the ability to forecast both aggregate and sectoral output. Among the main conclusions is that manufacturing, construction, and the primary sector are the most important sources of business cycle fluctuations for the Canadian economy.