Title: Stochastic trends and economic fluctuations reconsidered
Authors: Dietmar Bauer - University Bielefeld (Germany)
Lukas Matuschek - Technical University Dortmund (Germany)
Patrick de Matos Ribeiro - Technical University Dortmund (Germany) [presenting]
Martin Wagner - University of Klagenfurt (Austria)
Abstract: In a seminal paper the empirical performance of the neoclassical stochastic growth model by vector autoregressive (VAR) cointegration analysis has been investigated by using quarterly observations from 1949:1 to 1988:4. In addition to the real variables, private consumption, private investment and GNP net of government spending, they also consider nominal quantities, i.e., money (M2), prices (GNP deflator) and a short-term interest rate (federal funds rate). Economic theory predicts three cointegrating relationships, the two great ratios (consumption-ouptut and investment-output) as well as a money demand relationship. Furthermore, the relative importance of permanent and transitory shocks for the dynamic behaviour of the US economy is investigated. As is well-known, the solutions of dynamic stochastic economic models are generally vector autoregressive moving average rather than VAR processes, with the solutions typically given in state space format. Building upon recent advances in state space cointegration analysis, this paper reassesses, and extends by using data potentially up to 2018:4, the KPSW analysis from a state space perspective.