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OUTPUT FLUCTUATIONS IN THE G-7: AN UNOBSERVED COMPONENTS APPROACH

Published online by Cambridge University Press:  12 December 2011

Sinchan Mitra
Affiliation:
The University of Queensland
Tara M. Sinclair*
Affiliation:
The George Washington University
*
Address correspondence to: Tara M. Sinclair, Department of Economics and ESIA, George Washington University, Washington, DC 20005, USA; e-mail: tsinc@gwu.edu.

Abstract

This paper proposes a multivariate unobserved-components model to simultaneously decompose the real GDP for each of the G-7 countries into its respective trend and cycle components. In contrast to previous literature, our model allows for explicit correlation between all the contemporaneous trend and cycle shocks. We find that all the G-7 countries have highly variable stochastic permanent components for output, even once we allow for structural breaks. We also find that common restrictions on the correlations between trend and cycle shocks are rejected by the data. In particular, we find that correlations across permanent and transitory shocks are important both within and across countries.

Type
Articles
Copyright
Copyright © Cambridge University Press 2011

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