Abstract
This paper proposes decomposing macroeconomic fluctuations into three components based on their contributions to fluctuations of different frequencies. A first component explains business cycle fluctuations but has no long-run effect; a second component also influences business cycles but may have a long-run effect; a third component has only long-run effects. The decomposition has several desirable properties. The two business cycle components jointly explain 99% of business cycle fluctuations and deliver comovements consistent with a structural interpretation as demand and supply shocks, respectively. The presence of long-run, non-business cycle fluctuations biases full-information estimation of business cycle models, however, distorting conclusions about the sources of business cycles. Estimating a model to match only the business cycles shocks resolves this issue and gives more plausible parameter estimates.
Sanjay Moorjani
Visiting Assistant Professor
My research interests include Macroeconomics and Monetary Economics.