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Understanding the importance of permanent and transitory shocks at business cycle horizons for the UK
journal contributionposted on 2008-05-01, 00:00 authored by Paresh Narayan
The goal of this paper is to examine the relative importance of permanent and transitory shocks in explaining variations in macroeconomic aggregates for the UK at business cycle horizons. Using the common trend–common cycle restrictions, we estimate a variance decomposition of shocks, and find that over short horizons the bulk of the variations in income and consumption were due to permanent shocks while transitory shocks explain the bulk of the variations in investment. Our findings for income and consumption are consistent with real business cycle models which emphasize the role of aggregate supply shocks, while our findings for investment are consistent with the Keynesian school of thought, which emphasizes the role of aggregate demand shocks in explaining business cycles.
JournalPhysica A : statistical mechanics and its applications
Pagination2879 - 2888
LocationAmsterdam, The Netherlands
Publication classificationC1 Refereed article in a scholarly journal
Copyright notice2008, Elsevier B.V.