Fluctuations and facts Chapter 2

R. Lucas (1977) «Understanding Business Cycles» “…[understanding] business cycles means constructing a model in the most literal sense: a fully articulated artificial economy which behaves through time as to imitate closely the time series behavior of actual economies.”

King and Rebelo (1999) “Resuscitating RBC” "Business cycles research studies the causes and consequences of the recurrent expansions and contractions in aggregate economic activity"

Burns and Mitchell [1946] “Measuring business cycles”, NBER “Business cycles are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises: a cycle consists of expansions occurring at the same time in many economic activities, followed by similarly general recessions, contractions and revivals which merge into the expansion phase of the next cycle; this sequence of changes is recurrent but not periodic; in duration, business cycles vary from more than one year to ten or twelve years; they are not divisible into shorter cycles of similar character with amplitudes approximating their own.”

Source: Public Information Office National Bureau of Economic Research, Inc.Public Information Office Business Cycles expansions and contractions

Source: Public Information Office National Bureau of Economic Research, Inc.Public Information Office Business Cycles expansions and contractions (f’d)

Cycles in the US (1876 – 1986) Sachs et Larrain (1990) Macroeconomics

Cycles in the US (1876 – 1986) Sachs et Larrain (1990) Macroeconomics (f’d)

Cycles in the US (1876 – 1986) Sachs et Larrain (1990) Macroeconomics (f'd)

Estimated instantaneous standard deviation of 4-quarter growth of GDP per capita Source : Stock and Watson 2003

Estimated instantaneous standard deviation of 4-quarter growth of GDP per capita (f’ed)

Stock and Watson (1988) « Variable trends in Economic Time Series »

O. Blanchard and S. Fischer [1989] Lectures on macroeconomics “the picture that emerge is […] that of an economy on which both types of shocks play an important role. Transitory shocks matter and have a hump-shaped effect on output before their effects die out. But the path of output would be far from smooth even in the absence of those transitory shocks. What emerges is a more complex image of fluctuations, with temporary shocks moving output around a stochastic trend that itself contributes significantly to the movements in the real GNP”

Linear filter 1: HP filter : cycle component : trend component : controls the properties of the trend component generated by the filter

King and Rebelo (1999)

King and Rebelo (1993) linear

King and Rebelo (1993)

Stock and Watson (1998)

Linear filter 2: BP-filter (Baxter and King, 1999) The ideal band-pass filter has the following 2-sided infinite moving average representation: : L : lag operator. Symmetry ( ) is imposed. For stationary time-series: : random periodic components

BP filter (f’d) Then : Frequency-response function : with, and One can then show that :

M. Baxter and R. King (1999) « Measuring BC: Approximate Band-Pass Filters for Economic Time Series »

Goods’market

Inputs

Labor market

Source: Stock and Watson (1998) All variables (except r) are in logaritms and have been detrended using HP filter

Stylized facts for Europe Switzerland 1967:1-1984:2 Germany 1967:1-1984:2 UK 1967:1-1984:2France 1970:1-1990:2