Measuring business cycles by saving for a rainy day

Mario Crucini () and Mototsugu Shintani

No 50, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: We propose a simple saving-based measure of the cyclical component in GDP. The measure is motivated by the prediction that the representative consumer changes savings in response to temporary deviations of income from its stochastic trend, while satisfying a present-value budget constraint. To evaluate our procedure, we employ the bivariate error correction model of Cochrane (1994) to the member countries of the G-7 and Australia. Our estimates reveal, that to a close approximation, the stochastic trend component of GDP is consumption and the transitory component is the error correction term, which justifies the use of our saving-based measure.

Keywords: Business cycles; Saving and investment; Gross domestic product; Consumer behavior (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-bec, nep-cba, nep-dge, nep-mac and nep-opm
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Working Paper: Measuring Business Cycles by Saving for a Rainy Day (2010)
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