By Mario Crucini and Mototsugu Shintani
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.
The HP-filter is a largely atheoretic way to measure cyclical components in the data. The choice of the penalty parameter is somewhat arbitrary, which makes that the cyclical component may include fluctuations that households consider to be permanent or miss fluctuations that are cyclical. Using realized consumption as a yardstick for what the households consider to be permanent fluctuations, this paper may give us a better measure of cyclical components, based on some minimal theory.