Stochastic Trends and Economic Fluctuations

60 Pages Posted: 4 Jul 2004 Last revised: 6 Aug 2022

See all articles by Robert G. King

Robert G. King

Boston University - Department of Economics; Federal Reserve Bank of Richmond - Research Department; National Bureau of Economic Research (NBER)

Charles I. Plosser

Federal Reserve Bank of Philadelphia; National Bureau of Economic Research (NBER)

James H. Stock

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Mark W. Watson

Princeton University - Princeton School of Public and International Affairs; National Bureau of Economic Research (NBER)

Date Written: April 1987

Abstract

Recent developments in macroeconomic theory emphasize that transient economic fluctuations can arise as responses to changes in long run factors -- in particular, technological improvements -- rather than short run factors. This contrasts with the view that short run fluctuations and shifts in long run trends are largely unrelated. We examine empirically the effect of shifts in stochastic trends that are common to several macroeconomic series. Using a linear time series model related to a VAR, we consider first a system with GNP, consumption and investment with a single common stochastic trend; we then examine this system augmented by money and prices and an additional stochastic trend. Our results suggest that movements in the "real" stochastic trend account for one-half to two-thirds of the variation in postwar U.S. GNP.

Suggested Citation

King, Robert G. and Plosser, Charles I. and Stock, James H. and Watson, Mark W., Stochastic Trends and Economic Fluctuations (April 1987). NBER Working Paper No. w2229, Available at SSRN: https://ssrn.com/abstract=236671

Robert G. King (Contact Author)

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Charles I. Plosser

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James H. Stock

Harvard University - Department of Economics ( email )

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Mark W. Watson

Princeton University - Princeton School of Public and International Affairs ( email )

Princeton University
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