The Sources and Nature of Long-Term Memory in the Business Cycle

42 Pages Posted: 8 Aug 2007 Last revised: 27 Jul 2010

See all articles by Joseph G. Haubrich

Joseph G. Haubrich

Federal Reserve Bank of Cleveland

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

Date Written: April 1989

Abstract

This paper examines the stochastic properties of aggregate macroeconomic time series from the standpoint of fractionally integrated models, and focuses on the persistence of economic shocks. We develop a simple macroeconomic model that exhibits long-term dependence, a consequence of aggregation in the presence of real business cycles. We derive the relation between properties of fractionally integrated macroeconomic time series and those of microeconomic data, and discuss how fiscal policy may alter their stochastic behavior. To implement these results empirically, we employ a test for fractionally integrated time series based on the Hurst-Mandelbrot rescaled range. This test is robust to short-term dependence, and is applied to quarterly and annual real GNP to determine the sources and nature of long-term dependence in the business cycle.

Suggested Citation

Haubrich, Joseph G. and Lo, Andrew W., The Sources and Nature of Long-Term Memory in the Business Cycle (April 1989). NBER Working Paper No. w2951. Available at SSRN: https://ssrn.com/abstract=461385

Joseph G. Haubrich (Contact Author)

Federal Reserve Bank of Cleveland ( email )

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Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

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