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New Evidence on Balanced Growth, Stochastic Trends, and Economic Fluctations

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Whelan, Karl (Central Bank and Financial Services Authority of Ireland)

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Abstract

The one-sector Solow-Ramsey model informs how most modern researchers characterize macroeconomic trends and cycles, and evidence supporting the model’s balanced growth predictions is often cited. This paper shows, however, that the inclusion of recent data leads to the balanced growth predictions being rejected. An alternative balanced growth hypothesis-that the ratio of nominal consumption to nominal investment is stationery-is put forward, and new measures of the stochastic trends and cycles in aggregate US data are derived based on this hypothesis. The contrasting behaviour of real and nominal ratios is consistent with a two-sector model of economic growth, with separate production technologies for consumption and investment and two stochastic trends underlying the long-run behaviour of all macroeconomic series. Empirical estimates of these stochastic trends are presented based on a structural VAR and the role played in the business cycle by shocks to these trends is discussed.

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Paper provided by Central Bank & Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers with number 7/RT/04.

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Length: 42 pages
Date of creation: Oct 2004
Date of revision:
Handle: RePEc:cbi:wpaper:7/rt/04

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Rotemberg, Julio J & Woodford, Michael, 1996. "Real-Business-Cycle Models and the Forecastable Movements in Output, Hours, and Consumption," American Economic Review, American Economic Association, vol. 86(1), pages 71-89, March.
  2. Jonas D. M. Fisher, 2006. "The Dynamic Effects of Neutral and Investment-Specific Technology Shocks," Journal of Political Economy, University of Chicago Press, vol. 114(3), pages 413-451, June. [Downloadable!] (restricted)
  3. Charles I. Jones, 2005. "The Shape of Production Functions and the Direction of Technical Change," The Quarterly Journal of Economics, MIT Press, vol. 120(2), pages 517-549, May.
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  4. Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1991. "Stochastic trends and economic fluctuations," Working Paper Series, Macroeconomic Issues 91-4, Federal Reserve Bank of Chicago.
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  5. Jordi Gali, 1999. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," American Economic Review, American Economic Association, vol. 89(1), pages 249-271, March. [Downloadable!] (restricted)
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  6. Greenwood, Jeremy & Hercowitz, Zvi & Krusell, Per, 1997. "Long-Run Implications of Investment-Specific Technological Change," American Economic Review, American Economic Association, vol. 87(3), pages 342-62, June. [Downloadable!] (restricted)
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  7. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July. [Downloadable!] (restricted)
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  8. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2003. "What Happens After a Technology Shock?," NBER Working Papers 9819, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November. [Downloadable!] (restricted)
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  10. Whelan, Karl, 2002. "A Guide to U.S. Chain Aggregated NIPA Data," Review of Income and Wealth, Blackwell Publishing, vol. 48(2), pages 217-33, June. [Downloadable!] (restricted)
  11. Kim, Chang-Jin & Piger, Jeremy, 2002. "Common stochastic trends, common cycles, and asymmetry in economic fluctuations," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1189-1211, September. [Downloadable!] (restricted)
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  12. Cochrane, John H, 1994. "Permanent and Transitory Components of GNP and Stock Prices," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 241-65, February. [Downloadable!] (restricted)
  13. Carol Corrado & Lawrence Slifman, 1999. "Decomposition of Productivity and Unit Costs," American Economic Review, American Economic Association, vol. 89(2), pages 328-332, May. [Downloadable!] (restricted)
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  14. Greenwood, Jeremy & Hercowitz, Zvi & Krusell, Per, 2000. "The role of investment-specific technological change in the business cycle," European Economic Review, Elsevier, vol. 44(1), pages 91-115, January. [Downloadable!] (restricted)
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  15. Whelan, Karl, 2003. " A Two-Sector Approach to Modeling U.S. NIPA Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 627-56, August.
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  16. Boskin, Michael J, et al, 1998. "Consumer Prices, the Consumer Price Index, and the Cost of Living," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 3-26, Winter. [Downloadable!] (restricted)
  17. Fama, Eugene F., 1992. "Transitory variation in investment and output," Journal of Monetary Economics, Elsevier, vol. 30(3), pages 467-480, December. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Lavan Mahadeva & Juan Carlos parra, 2008. "Testing a DSGE model and its partner database," BORRADORES DE ECONOMIA 004507, BANCO DE LA REPÚBLICA. [Downloadable!]
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  2. Galí, Jordi, 2005. "Trends in Hours, Balanced Growth and the Role of Technology in the Business Cycle," CEPR Discussion Papers 4915, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  3. M.S.Rafiq, 2006. "Business Cycle Moderation - Good Policies or Good Luck: Evidence and Explanations for the Euro Area," Discussion Paper Series 2006_21, Department of Economics, Loughborough University. [Downloadable!]
  4. Peter N. Ireland & Scott Schuh, 2006. "Productivity and U.S. macroeconomic performance: interpreting the past and predicting the future with a two-sector real business cycle model," Working Papers 06-10, Federal Reserve Bank of Boston. [Downloadable!]
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  5. Peter N. Ireland, 2007. "On the Welfare Cost of Inflation and the Recent Behavior of Money Demand," Boston College Working Papers in Economics 662, Boston College Department of Economics. [Downloadable!]
    Other versions:
  6. M.S.Rafiq, 2006. "Great Ratios, Balanced Growth and Stochastic Trends: Evidence for the Euro Area," Discussion Paper Series 2006_20, Department of Economics, Loughborough University. [Downloadable!]
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