The Great Moderation Under the Microscope: Decomposition of Macroeconomic Cycles in US and UK Aggregate Demand
37 Pages Posted: 7 Jun 2011
Date Written: May 23, 2011
In this paper the relationship between the growth of real GDP components is explored in the requency domain using both static and dynamic wavelet analysis. This analysis is carried out separately for the US and UK using quarterly data, and the results are found to be substantially different for the two countries. One of the key findings of this research is that the ‘great moderation’ shows up only at certain frequencies, and not in all components of real GDP. We use these results to explain why the incidence of the great moderation has been so patchy across GDP components, countries and time periods. This also explains why it has been so hard to detect periods of moderation (or other periods) reliably in the aggregate data. We argue this cannot be done without separating the GDP components into their frequency components over time. Our results show why: the predictions of traditional real business cycle theory often appear not to be upheld in the data.
Keywords: business cycles, growth cycles, discrete wavelet analysis, US real GDP, UK real GDP
JEL Classification: C49, E20, E32
Suggested Citation: Suggested Citation