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Federal Reserve Bank of Dallas
Globalization Institute Working Papers
Measuring business cycles by saving for a rainy day
Mario J. Crucini
Mototsugu Shintani
Abstract

We propose a simple saving-based measure of the cyclical component in GDP. 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 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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Mario J. Crucini & Mototsugu Shintani, Measuring business cycles by saving for a rainy day, Federal Reserve Bank of Dallas, Globalization Institute Working Papers 50, 2010.
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Keywords: Business cycles ; Saving and investment ; Gross domestic product ; Consumer behavior
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