New evidence on balanced growth, stochastic trends, and economic fluctuations

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Title: New evidence on balanced growth, stochastic trends, and economic fluctuations
Authors: Whelan, Karl
Permanent link: http://hdl.handle.net/10197/218
Date: Oct-2004
Abstract: The one-sector Solow-Ramsey growth 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 inclu- sion of recent data leads to the balanced growth predictions being rejected. An alter- native balanced growth hypothesis that the ratio of nominal consumption to nominal investment is stationary is put forward, and new measures of the stochastic trends and cycles in aggregate US data are derived based on this hypothesis. The contrasting behavior 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 behavior 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.
Type of material: Technical Report
Publisher: 2004 Copyright Central Bank of Ireland
Subject LCSH: Economic development--Mathematical models
Business cycles
Stochastic processes
Language: en
Status of Item: Not peer reviewed
Appears in Collections:Economics Research Collection

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