A Time-frequency Analysis of the US and the European Business Cycles

• Activity Number: 245
• Type: Invited
• Date/Time: Tuesday, August 9, 2005 : 10:30 AM to 12:20 PM
• Sponsor: Business and Economics Statistics Section
• Author(s): Andrew Hughes Hallett*+ and Christian Richter
• Companies: Vanderbilt University and Loughborough University
• Keywords: Time-frequency techniques ; Coherence ; Growth rates ; Business cycles

Abstract

The search for and dating of a common European business cycle has been inconclusive. There is little consensus on the existence of such a cycle, on its periodicity and amplitude, or on the relationship of the member countries to that cycle. Yet cyclical convergence is the key consideration for countries that wish to be members of the common currency. The confusion over whether and to what degree the UK is converging on the cycles of her European partners, or whether her cycle is more in line with the US, is just one example of this lack of consensus. In this paper, we argue that countries will differ in the components and characteristics that make up their business cycles, as well as in the state of their cycle at any point. We show how to decompose each business cycle into its constituent cycles in a time-varying framework. That decomposes output at the European or national level into its component cycles and allows those components to vary in importance and characteristics over time. In this way, we can determine if the inconclusive results in Europe so far have arisen because member countries have some cycles in common, but diverge (i.e., have nothing in common) at other frequencies.