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Common Trends and Common Cycles

F. Vahid and R. F. Engle
Journal of Applied Econometrics
Vol. 8, No. 4 (Oct. - Dec., 1993), pp. 341-360
Published by: Wiley
Stable URL: http://www.jstor.org/stable/2285000
Page Count: 20
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Common Trends and Common Cycles
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Abstract

The existence of a serial correlation common feature among the first differences of a set of I(1) variables implies the existence of a common cycle in the Beveridge-Nelson-Stock-Watson decomposition of those variables. A test for the existence of common cycles among cointegrated variables is developed. The test is used to examine the validity of the common trend-common cycle structure implied by Flavin's excess sensitivity hypothesis and Campbell and Mankiw's mixture of rational expectations and rule-of-thumb hypothesis for consumption and income. Linear independence between the cointegration and the cofeature vectors is exploited to decompose consumption and income into their trend and cycle components.

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