New evidence on balanced growth, stochastic trends, and economic fluctuations

Karl Whelan ()

Open Access publications from School of Economics, University College Dublin

Abstract: The one-sector Solow-Ramsey growth model informs how most modern researchers characterize macroeconomic trends and cycles, and evidence supporting the model's balanced growth predictions is often cited. This paper shows, however, that the inclu- sion of recent data leads to the balanced growth predictions being rejected. An alter- native balanced growth hypothesis that the ratio of nominal consumption to nominal investment is stationary is put forward, and new measures of the stochastic trends and cycles in aggregate US data are derived based on this hypothesis. The contrasting behavior of real and nominal ratios is consistent with a two-sector model of economic growth, with separate production technologies for consumption and investment and two stochastic trends underlying the long-run behavior of all macroeconomic series. Empirical estimates of these stochastic trends are presented based on a structural VAR and the role played in the business cycle by shocks to these trends is discussed.

Keywords: Economic development--Mathematical models; Business cycles; Stochastic processes (search for similar items in EconPapers)
Date: 2004-10
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Citations: View citations in EconPapers (9)

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http://hdl.handle.net/10197/218 Open Access version, 2004 (application/pdf)

Related works:
Working Paper: New Evidence on Balanced Growth, Stochastic Trends, and Economic Fluctuations (2006)
Working Paper: New Evidence on Balanced Growth, Stochastic Trends, and Economic Fluctations (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:ucn:oapubs:10197/218

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