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Reproducing Business Cycle Features: Are Nonlinear Dynamics a Proxy for Multivariate Information?

  • James Morley

    ()

    (School of Economics, The University of New South Wales)

  • Jeremy Piger

    ()

    (University of Oregon)

  • Pao-Lin Tien

    ()

    (Wesleyan University)

We consider the extent to which different time-series models can generate simulated data with the same business cycle features that are evident in U.S. real GDP. We focus our analysis on whether multivariate linear models can improve on the previously documented failure of univariate linear models to replicate certain key business cycle features. We find that a particular nonlinear Markov-switching specification with an explicit “bounceback” effect continues to outperform linear models, even when the models incorporate variables such as the unemployment rate, inflation, interest rates, and the components of GDP. These results are robust to simulated data generated either using Normal disturbances or bootstrapped disturbances, as well as to allowing for a one-time structural break in the variance of shocks to real GDP growth.

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File URL: http://research.economics.unsw.edu.au/RePEc/papers/2012-23.pdf
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Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2012-23.

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Length: 37 pages
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:swe:wpaper:2012-23
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  1. James H. Stock & Mark W. Watson, 2002. "Has the Business Cycle Changed and Why?," NBER Working Papers 9127, National Bureau of Economic Research, Inc.
  2. James Morley & Jeremy M. Piger, 2005. "The importance of nonlinearity in reproducing business cycle features," Working Papers 2004-032, Federal Reserve Bank of St. Louis.
  3. Hess, Gregory D & Iwata, Shigeru, 1997. "Measuring and Comparing Business-Cycle Features," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(4), pages 432-44, October.
  4. Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1987. "Stochastic Trends and Economic Fluctuations," NBER Working Papers 2229, National Bureau of Economic Research, Inc.
  5. Chang-Jin Kim & James Morley & Jeremy Piger, 2003. "Nonlinearity and the permanent effects of recessions," Working Papers 2002-014, Federal Reserve Bank of St. Louis.
  6. Robert Breunig & Serinah Najarian & Adrian Pagan, 2003. "Specification Testing of Markov Switching Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(s1), pages 703-725, December.
  7. Michael P. Clements & Hans-Martin Krolzig, 2004. "Can regime-switching models reproduce the business cycle features of US aggregate consumption, investment and output?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(1), pages 1-14.
  8. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September.
  9. Frédérick Demers & Ryan Macdonald, 2007. "The Canadian Business Cycle: A Comparison of Models," Working Papers 07-38, Bank of Canada.
  10. Garcia, Rene, 1998. "Asymptotic Null Distribution of the Likelihood Ratio Test in Markov Switching Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 763-88, August.
  11. McQueen, Grant & Thorley, Steven, 1993. "Asymmetric business cycle turning points," Journal of Monetary Economics, Elsevier, vol. 31(3), pages 341-362, June.
  12. Don Harding & Adrian Pagan, 2000. "Disecting the Cycle: A Methodological Investigation," Econometric Society World Congress 2000 Contributed Papers 1164, Econometric Society.
  13. James Morley & Jeremy Piger, 2012. "The Asymmetric Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 94(1), pages 208-221, February.
  14. Gerhard Bry & Charlotte Boschan, 1971. "Foreword to "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs"," NBER Chapters, in: Cyclical Analysis of Time Series: Selected Procedures and Computer Programs, pages -1 National Bureau of Economic Research, Inc.
  15. Jean Boivin & Marc P. Giannoni, 2003. "Has Monetary Policy Become More Effective?," NBER Working Papers 9459, National Bureau of Economic Research, Inc.
  16. Gerhard Bry & Charlotte Boschan, 1971. "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs," NBER Books, National Bureau of Economic Research, Inc, number bry_71-1, June.
  17. Beatriz C. Galvao, Ana, 2002. "Can non-linear time series models generate US business cycle asymmetric shape?," Economics Letters, Elsevier, vol. 77(2), pages 187-194, October.
  18. 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.
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