Assessing U.S. Aggregate Fluctuations Across Time and Frequencies

45 Pages Posted: 1 Mar 2019 Last revised: 2 Mar 2019

See all articles by Thomas Lubik

Thomas Lubik

Federal Reserve Banks - Federal Reserve Bank of Richmond

Christian Matthes

Federal Reserve Bank of Richmond

Fabio Verona

Bank of Finland - Research

Date Written: 2019-02-28

Abstract

We study the behavior of key macroeconomic variables in the time and frequency domain. For this purpose, we decompose U.S. time series into various frequency components. This allows us to identify a set of stylized facts: GDP growth is largely a high-frequency phenomenon whereby inflation and nominal interest rates are characterized largely by low-frequency components. In contrast, unemployment is a medium-term phenomenon. We use these decompositions jointly in a structural VAR where we identify monetary policy shocks using a sign restriction approach. We find that monetary policy shocks affect these key variables in a broadly similar manner across all frequency bands. Finally, we assess the ability of standard DSGE models to replicate these findings. While the models generally capture low-frequency movements via stochastic trends and business-cycle fluctuations through various frictions, they fail at capturing the medium-term cycle.

Keywords: Wavelets, bandpass filter, SVAR, sign restrictions, DSGE model

JEL Classification: C32, C51, E32

Suggested Citation

Lubik, Thomas and Matthes, Christian and Verona, Fabio, Assessing U.S. Aggregate Fluctuations Across Time and Frequencies (2019-02-28). FRB Richmond Working Paper No. 19-6. Available at SSRN: https://ssrn.com/abstract=3345275

Thomas Lubik

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Christian Matthes (Contact Author)

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Fabio Verona

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

HOME PAGE: http://bofcris.solenovo.fi/crisyp/disp/_/en/cr_redir_all/fet/fet/sea?direction=3&id=3827426

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