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A century of gaps: Untangling business cycles from secular trends

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  • Constantinescu, Mihnea
  • Nguyen, Anh Dinh Minh

Abstract

Was the US economy overheating prior to 1929 and did financial factors play a similar part across the century? Did the housing boom and bust of mid 1920s play the same role as in the build up and subsequent crisis of 2007? We tackle these questions using a Bayesian macroeconometric trend-gap decomposition of U.S. output. Our analysis is presented in the tradition of comparative historical studies of the 1929 and 2007 crises. Results confirm the essential role of financial factors as conditioning variables estimating output gaps. Accounting for credit dynamics, U.S. potential output has been steadily expanding at roughly 2% since the beginning of 1980. The elasticity of output gaps with respect to credit gaps exhibits substantial time-variation.

Suggested Citation

  • Constantinescu, Mihnea & Nguyen, Anh Dinh Minh, 2021. "A century of gaps: Untangling business cycles from secular trends," Economic Modelling, Elsevier, vol. 100(C).
    • Handle: RePEc:eee:ecmode:v:100:y:2021:i:c:s0264999321000948
    DOI: 10.1016/j.econmod.2021.105505
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    More about this item

    Keywords

    Potential output; Output gap; Kalman filter; Real-financial cycle; Time-varying parameter; Great recession; Great depression;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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