Measuring international business cycles by saving for a rainy day

Macroeconomics inevitably begins with a trend-cycle decomposition of a nation's output. We propose a decomposition in which consumption is the trend component and savings is the cycle component. Using data from the G-7 plus Australia, we show that this decomposition identifies international business cycles that are: (i) more volatile, (ii) of longer mean duration and (iii) less correlated across countries than the cycle component from the Hodrick-Prescott filter. We argue that this difference stems from the fact that our method imposes a basic theoretical restriction arising from the permanent income hypothesis similar to the restriction used in Cochrane's ( ) decomposition.