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Abstract:
In a recent paper, Morley, Nelson and Zivot (2003) provide a unified framework for decomposing integrated time series into permanent and transitory components. We apply this decomposition to four U.S. time series for which there is strong evidence of a unit root. Our results suggest that shocks to these macroeconomic time series are predominately permanent. We also examine the consequences of using inappropriate methods of decomposing nonstationary time series into trend and cycle. We find that these methods systematically overestimate the importance of transitory shocks.
decomposition, business cycle, unobserved components
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Abstract:
This paper proposes a generalized multivariate framework to measure the significance of common permanent and transitory components in international business cycle fluctuations. I employ a multivariate unobserved components model with Markov regime switching to investigate the nonlinear dynamics of permanent and transitory components that are common across G7 real GDP series. The common components are modeled to exhibit different behavior in the expansion and recession phases of international business cycles. I find that, in contrast to the individual country's business cycles, the international business cycle does not exhibit classical recession and expansion phases. The international permanent component has two phases: a high-growth phase and a low-growth phase, and there is no evidence of a Friedman's pluck type recessionary period in the international transitory component. The switch from a high-growth regime to a low-growth regime occurs in the second quarter of 1973. There are no further switches that occur from one regime to the other. Among the seven developed nations examined, Japan is the most sensitive and Germany is the least sensitive to international permanent shocks.
Business cycle asymmetry, international business cycles, unobserved components model, state-space model, Markov switching, G7 countries
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