Postwar U.S.

Business Cycles: An Empirical Investigation

Author(s): Robert J. Hodrick and Edward C. Prescott
Source: Journal of Money, Credit and Banking, Vol. 29, No. 1 (Feb., 1997), pp. 1-16
Published by: Ohio State University Press
Stable URL: http://www.jstor.org/stable/2953682 .
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ROBERT J. HODRICK
EDWARD C. PRESCOTT

PostwarU.S. BusinessCycles:
An EmpiricalInvestigation
We propose a procedurefor representinga time series as the sum of a smoothly varying trendcomponentand a cyclical component.We documentthe natureof the comovements of the cyclical componentsof a varietyof macroeconomictime series. We
find that these comovements are very differentthan the correspondingcomovements
of the slowly varying trendcomponents.

THE PURPOSE
OFTHISARTICLE
is to documentsomefeatures
of aggregateeconomicfluctuations
sometimesreferredto as businesscycles. The
investigationuses quarterly
datafromthe postwarU.S. economy.The fluctuations
studiedarethosethataretoo rapidto be accountedfor by slowlychangingdemographicandtechnologicalfactorsandchangesin the stocksof capitalthatproduce
seculargrowthin outputpercapita.
As Lucas(1981)hasemphasized,aggregateeconomicvariablesin capitalisteconomiesexperiencerepeatedfluctuations
abouttheirlong-termgrowthpaths.Priorto
Keynes'General Theory, the studyof theserapidfluctuations,
combinedwiththe
attemptto reconcilethe observationswith an equilibrium
theory,was regardedas
themainoutstanding
challengeof economicresearch.AlthoughtheKeynesianRevSupport of the National Science Foundationis acknowledged. We also acknowledge helpful comments by the participantsat the 1979 SummerWarwickWorkshopon Expectationand the money workshops at the Universities of Chicago and Virginia and at Carnegie-MbllonUniversity.In particular,we
thankRobertAvery, V.V. Chari, Lars Peter Hansen, CharlesR. Nelson, Thomas J. Sargent, KennethJ.
Singleton, and JohnH. Wood for comments. We also thankthe WhartonEconomic ForecastingAssociates for providingthe data.
This paperis substantiallythe same as our 1981 workingpaper.The only majorchange to the paperis
the additionof an Appendixof Tablesthatmirrorour originalsand containdataending in 1993. Since we
did not updatethe citations, we apologize to the many authorswho have used the Hodrick-Prescottfilter
and studied its propertiesin the interveningeighteen years since its original development.

ROBERT
J. HODRICK
is NomuraProfessorof InternationalFinance at the GraduateSchool
of Business, ColumbiaUniversity.EDWARD
C. PRESCOTT
is Regents'Professorat the University of Minnesotaand Advisorto the FederalReserveBank of Minneapolis.Both are research
associates of the National Bureau of EconomicResearch.
Journal of MoneyvCreditvand Banking, Vol. 29, No. 1 (February1997)
Copyright1997 by The Ohio State University Press

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: MONEY, CREDIT,AND BANKING

olutionredirected
effortawayfromthisquestionto theone of determining
the level
of outputat a pointin timein disequilibrium,
thefailureof theKeynesianTheoryin
the 1970shas causedmanyeconomiststo wantto returnto the studyof business
cycles as equilibrium
phenomena.In theirsearchfor an equilibrium
modelof the
businesscycle, moderneconomistshavebeen guidedby the insightsof Mitchell
(1913)andotherswhohaveusedtechniquesof analysisthatweredevelopedpriorto
thedevelopment
of moderncomputers.Thethesisof thispaperis thatthesearchfor
an equilibrium
modelof the businesscycle is only beginningandthatstudyingthe
comovementsof aggregateeconomicvariablesusingan efficient,easilyreplicable
techniquethatincorporates
our priorknowledgeaboutthe economywill provide
insights into the featuresof the economy that an equilibriumtheory should
incorporate.
Thisstudyshouldbe viewedas documenting
somesystematicdeviationsfromthe
restrictions
uponobservations
impliedby neoclassicalgrowththeory.l Ourstatistical
approachdoes not utilizestandardtime seriesanalysis.Ourpriorknowledgeconcerningtheprocessesgenerating
thedatais notof thevarietythatpermitsusto specify
a probability
modelas required
forapplication
of thatanalysis.Weproceedin a more
cautiousmannerthatrequiresonly priorknowledgethatcanbe supported
by economictheory.Themaintained
hypothesis,basedupongrowththeoryconsiderations,
is thatthegrowthcomponent
of aggregateeconomictimeseriesvariessmoothlyover
time. The sensein whichit variessmoothlyis madeexplicitin section1.
Wefindthatthe natureof thecomovements
of thecyclicalcomponents
of macroeconomictimeseriesareverydifferentfromthecomovements
of theslowlyvarying
componentsof the corresponding
variables.Growthis characterized
by roughly
proportional
growthin (percapita)output,investment,consumption,
capitalstock
andproductivity
(outputperhour),andlittlechangein thehoursof employment
per
capitaor household.In contrast,thecyclicalvariations
in outputariseprincipally
as
the resultof changesin cyclical hoursof employmentand not as the resultof
changesin cyclicalproductivity
or capitalstocks.In thecase of the cyclicalcapital
stocks in both durableand nondurablemanufacturing
industries,the correlation
withcyclicaloutputis evennegative.Anotherdifferenceis in thevariability
of componentsof aggregatedemand.Cyclicalconsumption
variesonly one-halfandinvestmentthreetimesas muchas doescyclicaloutput.
Section2 presentsour findingsregardingthe comovementsof theseserieswith
the cyclicalcomponentof realGNP,as well as anexamination
of thecyclicalcomponentsof prices, interestrates,andnominalandrealmoneybalances.Section3
examinesthe serialcorrelation
propertiesof a numberof the series.
Severalresearchers,
usingalternative
methods,haveaddedandareaddingto our
knowledgeof aggregateeconomicfluctuations.2
Ourview is thatno one approach
dominatesall the othersandthatit is best to examinethe datafroma numberof
differentperspectives.We do think our approachdocumentssome interesting
regularities.
1. Lucas(1980)intexprets
theworkof Mitchell(1913)in a similarlight.
2. ExamplesincludeLitterman
andSargent(1979),NelsonandPlosser(1980),Neftci(1978),Sargent
andSims(1977),Sims(1980,a, b), andSingleton(1980).

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ROBERTJ. HODRICKAND EDWARDC. PRESCOU

: 3

1. DECOMPOSITION
PROCEDURE

The observedtime seriesareviewedas the sumof cyclicalandgrowthcomponents.Actually,thereis also a seasonalcomponent,butas the dataareseasonally
adjusted,thiscomponenthas alreadybeenremovedby thosepreparing
the dataseries. If growthaccountingprovidedestimatesof the growthcomponentwitherrors
thatweresmallrelativeto the cyclicalcomponent,computingthe cyclicalcomponentwouldbejusta matterof calculatingthedifferencebetweentheobservedvalue
andthe growthcomponent.Growththeoryaccounting(cf. Denison1974),in spite
of its considerable
success,is farfromadequateforprovidingsuchnumbers.If our
priorknowledgeweresufficientlystrongso thatwe couldmodelthegrowthcomponentas a deterministic
component,possiblyconditionalon exogenousdata,plus a
stochasticprocessandthe cyclicalcomponentas someotherstochasticprocess,estimatingthe cyclicalcomponentwouldbe an exercisein moderntimeseriesanalysis. Ourpriorknowledgeis not of this variety,so thesepowerfulmethodsarenot
applicable.Ourpriorknowledgeis thatthe growthcomponentvaries"smoothly"
overtime.
Ourconceptualframeworkis thata given time seriesYtis the sumof a growth
componentgt anda cyclicalcomponentct:
Yt=gtict

fort= 1, . . . ,T.

(1)

Ourmeasureof the smoothnessof the {gt} pathis the sum of the squaresof its
seconddifference.The ct aredeviationsfromgt andourconceptualframework
is
thatoverlongtimeperiods,theiraverageis nearzero.Theseconsiderations
leadto
the followingprogramming
problemfordetermining
the growthcomponents:
T

Min { E ct2+ A E [(gt-gt-l)-(gt-l-gt-2)]2

{g.}.=-1 t=1
t=1

(2)

wherect = Yt- gt. Theparameter

Ais a positivenumberwhichpenalizesvariability
in the growthcomponentseries.Thelargerthevalueof A,the smootheris the solutionseries.Fora sufficientlylargeA, attheoptimumall thegt 1 - gt mustbe arbitrarilynear some constant,Band thereforethe gt arbitrarily
neargO+ ,Bt.This
impliesthatthelimitof solutionsto program(2) as Aapproaches
infinityis theleast
squaresfit of a lineartimetrendmodel.
Ourmethodhasa longhistoryof use, particularly
in theactuarial
sciences.There
it is calledtheWhittaker-Henderson
TypeA method(Whittaker
1923)of graduating
or smoothingmortalityexperiencesin constructing
mortalitytables.Themethodis
still in use.3 As pointedout in Stigler's(1978)historicalreviewpaper,closelyrelatedmethodsweredevelopedby theItalianastronomer
Schiaparelli
in 1867andin
theballisticliterature
in the earlyfortiesby, amongothers,vonNeuman.
3. WethankPaulMilgromforbringingto ourattention
thattheprocedure
we employedhasbeenlong
usedin actuarial
science.

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4 : MONEY, CREDIT,ANDBANKING

Valueof the SmoothnessParameter

The dataanalyzed,with the exceptionof the interestrates,are in naturallogarithmsso thechangein thegrowthcomponent,gt - gt_l, corresponds
to a growth
rate.
The growthrateof labor'sproductivity
has variedconsiderably
overthisperiod
(see McCarthy1978).In the 1947-53 period,the annualgrowthratewas4.20 percent, in the 1953-68 period,2.61 percent,in the 1968-73 period,only 1.41 percent, andin the subsequent
periodit wasevensmaller.Partof thesechangescanbe
accountedfor by a changingcapital-labor
ratioandchangingcompositionof the
laborforce.But, as shownby McCarthy,
a sizableandvariableunexplained
componentremains,even aftercorrectingfor cyclicalfactors.The assumptions
thatthe
growthratehas been constantoverourthirty-year
sampleperiod,1950-79, is not
tenable.Toproceedas if it werewouldresultin errorsin modelingthegrowthcomponentandtheseerrorsarelikelyto be nontrivial
relativeto thecyclicalcomponent.
Forthisreason,an infinitevalueforthe smoothnessparameter
was notselected.
Thefollowingprobability
modelis usefulforbringingto bearpriorknowledgein
the selectionof the smoothingparameterA. If the cyclicalcomponentsand the
seconddifferencesof the growthcomponentswere identicallyandindependently
distributed,
normalvariableswithmeanszeroandvariancescr2 andcr2 (whichthey
arenot),the conditionalexpectationof thegt, giventhe observations,
wouldbe the
solutionto program(2) when< = (rl/Cr2
As thisprobability
modelhasa statespacerepresentation,
efficientKalmanfiltering techniquescanbe usedto computethesegt.4By exploitingthe recursivestructure, one need not inverta (T + 2) by (T + 2) matrix(T is the numberof
observations
in the sample)as wouldbe necessaryif one solvedthelinearfirst-order
conditionsof program(2) to determinethe gt. The largestmatrixthatis inverted
usingthe Kalmanfilteringcomputational
approachis 2 by 2. If T is large,this is
importantbecauseinvertinglargematricesis costly and therecan be numerical
roundingproblemswhenimplemented
on computers.Kalmanfilteringcanbe performedwithcomputerpackagesthatarewidelyavailable.
Ourpriorview is thata 5 percentcyclicalcomponentis moderately
large,as is a
one-eighthof 1 percentchangein the growthratein a quarter.Thisled us to select
<
= 5/(1/8) = 40 or A = 1,600as a valueforthesmoothingparameter.
Oneissue
is, how sensitivearethe resultsto the valueof A thatis selected?To explorethis
issue, variousothervaluesof A weretried.Table1 containsthe (sample)standard
deviationsandautocorrelations
of cyclicalrealGNPfor the selectedvaluesof the
smoothingparameter
as well as statisticsto testforthepresenceof a unitrootin the
cyclicalcomponents.5
Thesenumberschangelittleif Ais reducedby a factorof four
4. This minimizationhas two elements, gOand gO- g_i, which are treatedas unknownparameters
with diffuse priors. The Kalmansmoothingtechnique(see Pagan 1980) was used to compute efficiently
the conditionalexpectationsof the g,, given the observedy,. The posteriormeans of gOand gO- g_ 1 are
the generalizedleast squaresestimates. The conditionalexpectationof the g, for t 2 1 are linearfunctions
of these parametersand the observations.
5. The tests for the presence of a unit root are augmentedDickey-Fullertests in which the change in
the cyclical componentis regressedon a constant, the level of the cyclical component,and six lags of the

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ROBERTJ. HODRICKAND EDWARDC. PRESCOTT : 5

TABLE

STANDARD
THE

DEVIATION

SMOOTHING

AND

SERIAL

PARAMETER;

CORRELATIONS

SAMPLE

PERIOD:

A = 400
Standard

A = 1600

1.56%

Deviations

GNPFOR

OF CYCLICAL

DIFFERENT

VALUES

OF

1950.1-1979.2
A = 6400

1.80%

A = infinity

2.03%

3.12%

Autocorrelations

Order

2
3
4

.48
.15
- .14

Order

-.32

Order

6
7
8

- .39
- .42
- .44

Order

Order

10

Order
Order

Order
Order

Unit-Root

.84
.57
.27
- .01
-.20
- .30
- .38
-.44
-.44
-.41
- 4.47

.80

Order

-.41
.36

Test

5.02

.87
.65
.41
.17
.00
- .11
- .20
-.27
-.31
-.32
- 3.57

.94
.84
.73
.61
.52
.44
.38
.31
.25
.20
- 1.15

to 400 or increasedby a factorof fourto 6,400. As Aincreases,thestandard

deviation increasesandthereis greaterpersistence,withthe resultsbeingverydifferent
for A = oo.It is noteworthy
thatonlytheresultsforthelineardetrending
violatethe
assumptionthat no unit root is giving rise to nonstationarity
in the cyclical
component.
Withourprocedure
foridentifyingthegrowthcomponent(A= 1,600),theannual rateof changeof the growthcomponentvariedbetween2.3 and4.9 percentover
the sampleperiod,withthe minimaoccurringin 1957andin 1974.Themaximum
growthrateoccurredin 1964,withanotherpeakof 4.4 percentin 1950.Theaverage
growthrateoverthe periodwas 3.4 percent.Thedifferencesbetweenourcyclical
componentsandthoseobtainedwithperfectsmoothing(A = oo)aredepictedin Figure 1, alongwiththe cyclicalcomponent.The smoothnessof the variationin this
difference,relativeto the variationin the cyclicalcomponent,indicatesthatthe
smoothingparameter
chosenis reasonable.Wecautionagainstinterpreting
the cyclicalcharacteristic
of the differenceas a cycle of long duration.Suchpatternscan
appearas artifactsof thedataanalysisprocedure.
Thesametransformation
was usedfor all series:thatis, foreachseriesj
T

gjt =

WitYji,

(3)

i=l

whereT is thelengthof thesampleperiod.If thesamplesize wereinfinite,it would

notbe necessaryto indexthesecoefficientsby t and
00

gjt

=
i=

change

Wl

in the cyclical

component.

t-statistic

for the coefKcient

of

(5 percent)

-2.89

(4)

Yjti

_00

on the

or -3.50

(l

One

rejects

level

of the cyclical

the presence

of a unit

component

root

is more

in the cyclical
negative

percent).

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than

component

if the

the critical

value

: MONEY, CREDIT,AND BANKING

cydical GNP (x=O)

rcyclical GNP (1=1600)

(AX

:,
\

0|41 \t-01

AW
W
A T\

l As

-1

IV,,

-2

-3

cycilcal GNP (X=1600)

-4

-5

1950

1952

1954

1956

1958

1960

19621

1964
1966
YEAR

1968

1970

1972

1974

t976

1978

FIG. 1.

where

wiw= 0.8941i [0.056168cos(0.11168i) + 0.055833sin(0.11168i)]

(s)

for i 2 0 andwi = w-i forl < o.6 Fort, farfromeithertheendor thebeginningof

the sample,the wTarenearwt_i, so ourmethodis approximately
a two-waymoving averagewithweightssubjectto a dampedharmonic.Theadvantage
of usingthe
exactsolutionis thatobservations
nearthebeginningandtheendof thesampleperiod arenotlost.
The abovemakesit clearthatthe dataarebeingfiltered.As any filteraltersthe
serialcorrelationpropertiesof the data,the reportedserialcorrelations
shouldbe
interpretedwith caution.The resultsdo indicatethat thereis considerablepersistencein the rapidlyvaryingcomponentof output.Whenusingthe statisticsreportedhere to examinethe validityof a modelof the cyclicalfluctuations
of an
artificialeconomy,the serialcorrelationof the rapidlyvaryingcomponentof the
model'saggregateoutputseriesshouldbe comparedto thesenumbers.Thatis, the
model'soutputseriesshouldbe decomposedpreciselyas was thedataforthe U.S.
6. See Miller (1946) for a derivation. There are certainimplicit restrictionson the y, sequence when
the sample is infinite. Otherwise, the gj, may not exist. We requirethat the {y,} sequence belongs to the
space for which
0

.8941l'llyj,l < m.

,=-r

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ROBERTJ. HODRICKAND EDWARDC. PRESCOTT : 7

economy.Only then, would the model's statisticsand those reportedhere be

comparable.
As the comovementresultswere not particularly
sensitiveto the value of the
smoothingparameter
A selected,in the subsequent
analysisonlythe statisticsfor A
= 1,600arereported.Witha largerA, the amplitudes
of fluctuations
arelarger,but
the relativemagnitudesof fluctuations
of the serieschangelittle.Wedo thinkit is
important
thatall seriesbe filteredusingthe sameparameter
A.
2. VARIABILITYAND COVARIABILITYOF THE SERIES

The componentsbeingstudiedarethe cyclicalcomponentsandsubsequently

all
referencesto a seriesrelateto its cyclicalcomponent.The samplestandard
deviationsof a seriesis ourmeasureof a series'svariability,
andthecorrelation
of a series
withrealGNPis ourmeasureof a series'scovariability.
Thesemeasuresarecomputedfor the firsthalf andthe secondhalfof the sample,as well as for the entire
sample.Thisis a checkforthe stabilityof the measuresovertime.
A variablemightbe stronglyassociatedwithrealoutput,butleador lag realoutput.Therefore,as a secondmeasureof the strengthof associationwithrealoutput,
theR-squared
forthe regression
2

cjt= aj +

E
i= -2

>iGNPt_i

(6)

for eachseriesj was computed.

Theratioof the explainedsumof the squaresforthisregressionto the explained
sum of squaresfor the regressionwhenthe coefficientsare not constrained
to be
equalin thefirstandthesecondhalvesof thesampleis ourmeasureof stability.It is
a numberbetweenzero and one, with one indicatingthatthe best-fitequationis
preciselythe samein the firstandsecondhalvesof the sample.
WechosethismeasureratherthanapplyingsomeF-testfortworeasons.First,we
do notthinkthe assumption
of uncorrelated
residualsis maintainable.
Second,even
if it were, it is very difficultto deducethe magnitudeof the instabilityfromthe
reportedteststatistic.
AggregateDemand Components

Thefirstset of variablesstudiedaretherealaggregatedemandcomponents.The
resultsaresummarized
in Tables2 and3. Theseriesthatvarytheleastareconsumption of services,consumption
of nondurables
andstateandlocal government
purchasesof goodsandservices.Eachof thesehasstandard
deviationless thanthe 1.8
percentvalueforrealoutput.Theinvestmentcomponents,includingconsumerdurableexpenditures,are aboutthreetimes as variableas output.Covariabilities
of
consumption
andinvestmentwithoutputaremuchstrongerthanthecovariability
of
government
expenditures
withoutput.

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: MONEY, CREDIT,AND BANKING

TABLE

AGGREGATE
SAMPLE

DEMAND

PERIOD:

1950.

COMPONENTS:

STANDARD

DEVIATIONS

AND

CORRELATIONS

WITHGNP

1-1979.2
Average
Standard Deviations
Whole

Real

GNP

Total

Consumption

Services
Nondurables
Durables
Total

Invest.

Fixed

Residential
Nonresidential
Equipment
Structures
Total

Government

Federal
State

and

Local

1.8
1.3
.7
1.2
5.6
5.1

10.7
4.9
5.8
4.5
4.8
8.7
1.3

First Half

1.7
1.2
.7
1.0
6.1
4.2
8.5
4.4
5.6
3.8
6.5
11.6
1.6

Second Half

1.9
1.4
.6
1.3
5.0
5.9
12.4
5.3
5.9
5.1
2.2
4.2
1.0

opferReenalt

Correlations with Real Output

in Percents

First Half

Whole

.739
.615
.714
.574
.714
.436
.684
.707
.512
.258
.266
-.170

.503
.441
.575
.298
.454
.123
.554
.642
.225
.353
.377
-.408

Second Half

GNP

.917
.781
.808
.884
.884
.637
.777
.760
.698
.152
.125
.131

61.7
26.8
26.5
8.4
14.2
4.4
9.7
6.0
3.7
22.6
10.8
11.8

Factors of Production

andproducThe secondset of variablesconsideredarethe factorsof production

in Tables4 and5.
tivity whichis outputper hour.Theseresultsare summarized
betweenhoursandoutput.In addiThereis a strongandstablepositiverelationship
to thevariabilityin output.Thecontemtion, thevariabilityin hoursis comparable
andoutputis weakandunstablewith
poraneousassociationbetweenproductivity
deviabeingmuchsmallerthanthe standard
the standarddeviationof productivity
to notethatwhenleadandlag GNPsareincluded,the
tionof output.It is interesting

TABLE 3
OFASSOCIATION
WITHGNP ANDMEASURE
STRENGTH
DEMAND
COMPONENTS:
AGGREGATE
OFSTABILITY
1950.1-1979.2
SAMPLE
PERIOD:
R2 for Regression
Correlationwith
Real Output
Squared

Total Consumption
Services
Nondurables
Durables
Total Invest. Fixed
Residential
Nonresidential
Equipment
Structures
Total Government
Federal
State and Local

.546
.378
.510
.329
.509

.190
.468
.500

.262
.067
.071
.029

cJ, = aJ +

2
E

fij,GNP,+

Stability Measure
.620
.424
.589
.415
.552
.441
.602
.631
.367
.119
.129
.095

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.922
.877
.968
.829
.785
.809
.831
.908
.834
.509
.482
.298

ROBERTJ. HODRICKAND EDWARDC. PRESCOTT : 9

TABLE

OF PRODUCTION:

FACTORS
SAMPLE

PERIOD:

STANDARD

DEVIATIONS

AND

Standard Deviations
Whole
Real

GNP

Capital

WITHGNP

CORRELATIONS

19SO.1-1979.2
First Half

Correlations with Real Output

in Percents

Whole

Second Half

1.8

1.7

1.9

1.7
1.2
.7
2.0

1.4
1.0
.7
1.8
.5
1.2
1.l

First Half

Second Half

Stocks

Employees

1.4

2.0
1.4
.7
2.1
.6
1.6

Productivity

1.0

1.0

Inventory
Capital

Stock

Durables

Capital

Stock

Nondurables

Hours
Work

.5

Week

.507
-.210
-.236
.853
.820
.773
.100

.309
-.274
-.297
.824
.800
.732
.361

.686
-.178
-.185
.896
.854
.831
-.231

associationbetween GNP and productivityincreases dramaticallywith the

R-squared
increasingfrom.010 to .453.
goodsindustries,areless
Capitalstocks,bothin durablegoodsandnondurable
stocks,on
variablethanrealoutputandnegativelyassociatedwithoutput.Inventory
with
to output,andtheircorrelations
the otherhand,havea variabilitycomparable
outputarepositive.Further,the strengthof associationof inventorieswithGNPincreaseswhenlag andleadGNPsareincludedin theregression.Thisis indicatedby
from.257 to .622.
the increasein theR-squared
Monetary Variables

Resultsforthe finalset of variablesarepresentedin Tables6 and7. Correlations

betweennominalmoney,velocity,andrealmoneywithGNPareall positive.The
in the firstandsecondhalvesof the sample,withthe
differencesin the correlations
instabilityovertimein theserelaexceptionof nominalM1, suggestconsiderable
interestrate.The correlationships.A similarconclusionholdsfor the short-terrn
tionsof GNPwiththepricevariablesarepositivein the firsthalfof the sampleand

TABLE

OF PRODUCTION:

FACTORS
SAMPLE

PERIOD:

1950.

STRENGTH

OF ASSOCIATION

WITH

GNP

AND

MEASURE

OF STABILITY

1-1979.2
R2 for Regression
Correlation with
Real Output
Squared

Capital

Inventory
Stock

Durables

Capital

Stock

Nondurables

Hours
Week

Employees
Average

fij,GNP,+I

t=-2

Stability Measure

Stocks

Capital

Work

2
cjt = aj +

Product

of Labor

.257
.044
.056
.728
.672
.600
.010

.622
.235
.129
.838
.700
.801
.453

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.828
.782
.740
.954
.513
.935
.773

10 : MONEY,CRED1T,
ANDBANKING

TABLE 6
MONETARY
ANDPRICEVARIABLES:
STANDARD
DEVIATIONS
ANDCORRELATIONS
WITHGNP
SAMPLE
PERIOD:
1950.1-1979.2
su
Whole

Real GNP
M1
Nominal Value
Velocity
Real Value
M2
Nominal
Velocity
Real Value
InterestRates
Short
Long
Price Indexes
GNP Deflator
CPI

ndardDeviations in Percents
First Half

1.8

1.7

1.9

.9
1.6
1.5

.8
2.0
1.2

1,0
1.0

1. 1
1.9
1.8

2.4
1.4

.9

27

.24
.06
1.0
1.3

1.0
1.3

Correlationswith Real Output

Second Half

Whole

First Half

Second Half

1.7

.661
.614
.565

.675
.801
.079

.649
.415
.865

1.3
1.2
2.1

.480
.529
.432

.175
.818
221

.665
.131
.828

510

.738
.640

.255
175

- .239
-.316

.490
.223

814
799

19
1.1
1.3

negativein thesecondhalfwiththecorrelation
fortheentireperiodbeingsmalland
negative.
3. SERIAL CORRELATIONPROPERTIESOF DATA SERIES

A sixth-order
autoregressive
processwas fit to a numberof the serieswhichdisplayedreasonablestablecomovementswithrealoutput.Figure2 presentsplotsof
the unitimpulseresponsefunctionsforGNPandnineotherseriesfortheestimated
TABLE 7
MONEYANDPECEVARIABLES:
STRENGTH
OFASSOCIATION
WITHGNP ANDMEASURE
OFSTABILITY
SAMPLE
PERIOD:
1950.1-1979.2
22

CoITelationwith
Real Output
Squared

for Regession

CJf= atJ +

2
E ISJIGNPr+I
t= -2

Stability Measure

M1

Nominal Value
ve OClty
Real Value
M2
. ..
.
.
> omlna va ue
Velocity
Real Value
InterestRates
Short
Long
Price Index
GNP Deflator
CPI
.

.437
.378
.319

.445
.408
.495

.378
.281
.678

.230
.280
.187

.371
.376
.428

.749
.650
.684

.260
.037

.506
.381

.748
.724

.261
.330

.567
.481

*057
.010

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_
-

o
o

CSJJ
o

CONSUMPTION

GNP

o
o

V--

CM

310

20

11O

20

20

10

FIXEDINVESTMENT

HOUR

1b

110

1'o

do

3l0

0-

uz

EMPLOYEE

;
uz
o

o
o

WORKWEEK

\
o

uz

'

'-o

31

20

110

'

Po

o
-

of

M1

d
CM
w

210

'

- /

.NTORY
INVE

/-

UZ

cr.

CJURABLE
CAPITAL

--

UZ
-

20

30

UZ
o
o
o

1'0

20

r\

CM

3'0 b '

1o

CM
o

cM -

VELOCI5M1

D
o

30

10

FIG.2. Unit Impulse Response Function

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20

3|0

ANDBANKING
12 : MONEY,CRED1T,

function.7ThefunctionforGNPincreasesinitiallyto a peakof 1.15

autoregressive
in periodone andhas a minimumof -.39 in periodeight. The patternsfor conis in the
sumptionandinvestmentaresimilarexceptthatthe peakfor consumption
andeachof its threecomponents(not
initialperiod.The functionfor consumption
pictured)aresimilarto the one for the aggregate.
The patternfor totalhoursandthe numberof employees,exceptfor the greater
amplitude,is verysimilarto the patternfor GNP.Theaveragework-weekpattern,
however,begins to declineimmediatelyand the periodof dampedoscillationis
shorter.Themonetaryvariableshaveverydifferentresponsepatterns,indicatingsepropertiesverydifferentthanthoseof realoutput.
rialcorrelation
Thereis a dramaticdifferencein theresponsepatternforthecapitalstockin durable goodsindustries.Themaximumamplitudeof theresponseis muchgreater,beto the unitimpulse.The
ing about3.6, andoccursslightlyovera yearsubsequent
(notpictured)is simigoodsindustries
patternforthecapitalstockin thenondurable
larthoughthemaximumamplitudeis smaller,being2.8. Forbothcapitalstocksthe
peaksin the unitresponsefunctionarein periodfive.
APPENDIX

All the datafromthe originalpaperwereobtainedfromthe WhartonEconomic

interestratewas the
DataBank.The short-term
ForecastingAssociationQuarterly
taxablethree-monthU.S. Treasurybill rate, and the long-terminterestrate, the
long-termbonds.
yieldon U.S. Government
TablesA. 1-A.7 containdatafrom 1947.1to 1993.4. All datafor TablesA. 1A.3 comefromthe NationalIncomeandProductAccounts:HistoricalNIPAQuarof Commerce.Thecapital
Business,U.S. Department
terlyData,Surveyof Current
Businessas anstockdatain TablesA.5 andA.6 comefromthe Surveyof Current
investmentseriesfromtheNIPAwiththeannualcapnualseries.Weusedquarterly
ital stocksto constructquarterlyseries.All labordatain TablesA.5 andA.6 come
fromCitibase.Dataforthepriceseriesin TablesA.6 andA.7 alsocomefromCitibase. The interestrateseriesare fromthe FederalReserveBulletinand are constructedfromthe monthlyseriesin Tables1.33 and 1.35. RealM1 andReal M2
HistoricalDiskette,publishedby
wereobtainedfromtheBusinessCycleIndicators
of Commerce.Nominalserieswerecalculatedby multiplying
the U.S. Department
by the GNPdeflator.
7. Letting a, be the innovationsand
ct

Ct=

Zia,_i

i=o

be the invertiblemoving averagerepresentation,parameter0, equals the value of the unit responsefunction in period i. One must take care in interpretingthe responsepattern.Two moving averageprocesses
can be observationallyequivalent (same autocovariancesfunction) yet have very differentresponsepatterns. We chose the invertiblerepresentationbecause it is unique. It is just one way to representthe serial
correlationpropertiesof a covariance stationarystochastic process. Others are the spectrum, the autoregressive representation,and the autocovariancefunction.

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TABLEA1
STANDARD

DEVIATION

OF THE

SMOOTHING

Standard

Deviations

AND

SERIAL

PARAMETER.

CORRELATIONS

SAMPLE

PERIOD:

OF CYCLICAL
GNPFOR
1947.1-1993.4

A = 400

Autocorrelations
Order 1
Order2
Order3
Order4
OrderS
Order6
Order7
Order 8
Order9
Order 10
Unit-Root Test

TABLE

A = 1600

1.47%

DIFFERENT

A = 6400

1.80%

A = - infinity

2.14%

.86
.64
.39
.16

.81
.53
.22
-.03
-.21
-.32
-.39
-.43
-.40
-.35
-6.52

VALUES

44.94%

.9o

.96

.73
.53
.34
.18
.02

-.05

-.27
-.30
-.37
-.40
-.40

.91

.86
.80
.74
.69
.63
.58
.52
.47
-2.34

09
.19

26
28
98

-5.91

A2

AGGREGATE DEMAND COMPONENTS: STANDARD DEVIATIONS AND CORRELATIONS WITH

SAMPLE PERIOD: 1947.1-1993.4
StandardDeviations in Percents

RealGNP
Total Consumption
Services
Nondurable
Durables
Total Invest. Fixed
Residential
Nonresidential
Equipment
Structures
Total Government
Federal
State and Local

GNP
Average
opferReenalt

Correlationswith Real Output

Whole

First Half

Second Half

Whole

First Half

Second Half

GNP

1.8
1.2
0.7
1.2
5.5
5.5
10.9
5.1
6.1
4.8
3.9
6.9
1.5

1.8
0.9
0.7
1.0
5.4
4.5
9.1
4.6
5.8
3.8
5.4
9.5
1.9

1.8
1.4
0.8
1.3
5.6
6.4
12.6
5.6
6.4
5.6
1.2
1.9
1.1

.719
.685
.707
.457
.732
.462
.746
.798
.469
.350
.348
- .216

.511
.544
.558
.112
.470
.755
.659
.715
.397
.515
.540
- .453

.875
.810
.827
.787
.927
.745
.820
.871
.528
-.012
- .164
.015

61.7
31.2
24.5
6.9
15.2
5.1
10.1
6.1
4.0
21.6
10.7
10.8

TABLE A3
AGGREGATE
DEMAND
COMPONENTS:
STRENGTH
OFASSOCIATION
WITHGNP ANDMEASURE
OFSTABILITY
SAMPLE
PERIOD:
1947. 1-1993.4
R2 for Regression
Correlationwith
Real Output
Squared

Total Consumption
Services
Nondurables
Durables
Total Invest. Fixed
Residential
Nonresidential
Equipment
Structures
Total Government
Federal
State and Local

.517
.469
.500
.209
.536
.213
.557
.637
.220
.123
.121
.047

Cj, = 0tj +

2
22

jiGNP,+

Stability Measure
.571
.512
.520
.324
.580
.482
.662
.702
.396
.229
.224
.080

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.808
.873
.872
.669
.796
.731
.929
.955
.792
.500
.436
.200

TABLEA4
WITHGNP
FACTORSOF PRODUCTION:STANDARDDEVIATIONSAND CORRELATIONS
SAMPLEPERIOD:1947.1-1993.4
withRealOutput
Correlations
SecondHalf
Whole
FirstHalf

Standard
Deviations
in Percents
FirstHalf
SecondHalf
Whole

RealGNP
CapitalStocks
Inventory
CapitalStockDurables
CapitalStockNondurables
Hours
WorkWeek
Employees
Productivity

TABLE

1.8

1.8

1.8

2.1
1.2
1.0
1.8
1.1
1.5
0.9

2.4
1.1
1.0
1.9
1.1
1.6
1.0

1.8
1.2
0.9
1.7
1.0
1.5
0.8

.510
.510
- .055
.883
.778
.828
.239

.547
.387
- .125
.860
.778
.808
.151

.475
.619
.021
.911
.783
.850
.360

AS

FACTORS OF PRODUCTION: STRENGTH OF ASSOCIATION WITH

SAMPLE PERIOD: 1947. 1 - 1 993.4

GNPAND

MEASURE OF STABILITY

R2 for Regression
CoITelationwith
Real Output

c,, - sx, +

'

Squared

Capital Stocks
Inventory
Capital Stock Durables
Capital Stock Nondurables
Hours
Work Week
Employees
Average Productof Labor

J t=-2

,,GNP,+I

Stability
Measure

'

.801
.967
.874
.992
.994
.989
.933

.373
.728
.356
.869
.764
.858
.465

.260
.260
.003
.779
.605
.685
.057

TABLE A6
WITH GNP
ANDCORRELATIONS
DEVIATIONS
STANDARD
MONETARY
ANDPRICEVARIABLES:
1947.1-1993.4
SAMPLE
PERIOD:

Real GNP
M1
Nominal Value
Velocity
Real Value
M2
Nominal
Velocity
Real Value
InterestRates
Short
Long
Price Indexes
GNP Deflator
CPI

Deviations
inPercents
Standard
Second
Hif
Whole
FirstHif
1.8
1.8
1.8

wole
-

with RealOuWut
colTelations
Second
Hif
FirstHif
-

2.1
2.7
2.7

1.3
2.1
1.6

2.7
3.1
3.4

.368
.328
.347

.542
.680
.219

.318
.104
.436

1.8
2.5
2.4

1.4
2.5
1.8

2.2
2.6
2.9

.337
.404
.319

.324
.672
.058

.357
.151
.49l

1.1
0.6

0.6
0.2

1.5
0.8

.324
.032

.335
.228

.358
-.020

1.0
1.6

1.0
1.4

1.0
1.7

.327
.247

-.635
-.585

-.156
-.222

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ROBERTJ. HODRICKAND EDWARDC. PRESCOTT : 15

TABLE

A7

MONEY

AND

PRICE

VARIABLES:

STRENGTH

OF ASSOCIATION

WITH

GNP

AND

MEASURE

OF STABILITY
SAMPLE

PERIOD:

1947.1-1993.4

CoIIelation with
Real Output
Squared

R2forRegression
2
cJ,= (xJ+ E J,GNP,+l
i=-2

StabilityMeasure
.783

M1
Nominal

Value

.135

.229

Velocity

.108

.280

.747

Real

.120

.270

.738

Value

M2
Nominal

Value

.114

.291

.782

Velocity

.163

.377

.755

Real

Value

.102

.321

.707

Interest

Rates

Short

.105

.336

.701

Long

.001

.191

.701

.024

.199

.430

.049

.248

.485

Price

Index

GNP

Deflator

CPI

LITERATURE

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