Discussion Paper Series 2011-E-14

Measuring International Business Cycles by Saving for a Rainy Day

Mario J. Crucini, Mototsugu Shintani

We examine the business cycles of the member countries of the G-7 and Australia based on the cyclical measure considered by Cochrane (1994). 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 long-run budget constraint. We also compare Cochrane's original cyclical measure and an alternative simple saving-based measure and show that they track each other. Our analysis reveals that the extent of international business cycle comovement and the Great Moderation are significantly altered when the saving-based measures are employed in place of commonly used univariate business cycle filters.

Keywords: Error correction model; the Great Moderation; international comovement puzzle; permanent income hypothesis; stochastic trends; trend cycle decomposition

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2011 Bank of Japan All Rights Reserved.

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