Essays in business-cycle analysis.

Abstract

The practice of band-pass filtering---the non-structural, frequency-domain-based decomposition of economic time series into trend and cyclical components---is critically assessed by making two main points. First, it is shown that depending on the stochastic properties of the filtered process, the band-pass filtered cyclical component is entirely authentic, partly or mostly spurious, or even entirely spurious, where the notion of 'authenticity' is defined with reference to a structural model. Second, taking a number of macroeconomic models as data generation processes it is shown that band-pass filtering (a) may markedly distort key business-cycle stylized facts, as captured by the cross-correlations and the cross-spectral statistics between the cyclical components of the variables of interest and the cyclical component of GDP, and (b) may well create entirely spurious stylized facts. The cyclical behavior of the labor force at the business-cycle frequencies is then investigated via frequency-domain techniques. Both teenagers and blacks display a strong pro-cyclicality, while for other labor force segments empirical evidence seems to indicate the absence of any strong responsiveness to cyclical fluctuations in economic activity.