The role of permanent and transitory components in business cycle volatility moderation |
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Authors: | Oleg Korenok Stanislav Radchenko |
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Institution: | (1) Department of Economics, VCU School of Business, 1015 Floyd Avenue, Richmond, VA 23284, USA;(2) Department of Economics, University of North Carolina at Charlotte, Charlotte, NC 28223, USA |
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Abstract: | The paper examines the processes underlying economic fluctuations by investigating the volatility moderation of U.S. economy
in the early 1980s. We decompose the volatility decline using a dynamic factor framework into a common stochastic trend, common
transitory component and idiosyncratic components. We find that the moderation of business cycle was a result of the moderation
in transitory and idiosyncratic components. Our results suggest that important part of stochastic process that drives economy
is transitory. The paper investigates the role of oil prices, monetary and financial market factors. Proposed economic factors
do not have a significant relationship to either transitory or permanent components. In addition, we find that transitory
shocks are as common during the 1980s and 1990s as they were during the 1960s and 1970s.
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Keywords: | Volatility decline Great moderation Transitory shocks Asymmetry Factor models |
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