NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Measuring Business Cycles by Saving for a Rainy Day

Mario J. Crucini, Mototsugu Shintani

NBER Working Paper No. 16075
Issued in June 2010
NBER Program(s):   EFG   IFM

We propose a simple saving-based measure of the cyclical component in GDP. The measure is motivated by the prediction that the represenative 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.

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Document Object Identifier (DOI): 10.3386/w16075

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