Assessing U.S. aggregate fluctuations across time and frequencies

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Title: Assessing U.S. aggregate fluctuations across time and frequencies
Author: Lubik, Thomas A. ; Matthes, Christian ; Verona, Fabio
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
Series number: 5/2019
Year of publication: 2019
Publication date: 20.2.2019
Pages: 67
Subject (yso): aikasarjat; bruttokansantuote; inflaatio; korko; työttömyys; rahapolitiikka; häiriöt; suhdannevaihtelut; taloudelliset mallit
Keywords: Yhdysvallat
JEL: C32; C51; E32
Other keywords: Wavelets; bandpass filter; SVAR; sign restrictions; DSGE model
Abstract: We study the behavior of key macroeconomic variables in the time and frequency domain. For this purpose, we decompose U.S. time series into various frequency components. This allows us to identify a set of stylized facts: GDP growth is largely a high-frequency phenomenon whereby inflation and nominal interest rates are characterized largely by low-frequency components. In contrast, unemployment is a medium-term phenomenon. We use these decompositions jointly in a structural VAR where we identify monetary policy shocks using a sign restriction approach. We find that monetary policy shocks affect these key variables in a broadly similar manner across all frequency bands. Finally, we assess the ability of standard DSGE models to replicate these findings. While the models generally capture low-frequency movements via stochastic trends and business cycle fluctuations through various frictions they fail at capturing the medium-term cycle.

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