Economic dynamics may be different than it seems: multiplicity of relevant economic cycles

Abstract

A model of cyclical signals, trend and noise is developed, allowing more than one cycle per each variable and the composition of cycles to differ for each macroeconomic aggregate. Estimation and best-model selection result in very good fit to the data, revealing that many cycles drive macroeconomic aggregates, which undergo fundamentally different cyclical fluctuations. The most pronounced cycles are those below the traditional business-cycle band. The constructed model allows to test whether the growth of an economy is balanced. Results demonstrate that economies may undergo unbalanced growth. It has been shown that small open economies' cycles are not necessarily driven by the rest-of-the-world conditions. A constructed method of evaluating whether government's consumption is procyclical and whether its noncyclical part is reactive to or actively shaping output growth is presented and applied. The devised framework constitutes a research and policy tool that enables to discover the rich cyclical structure of macroeconomies.