Working Paper: CEPR ID: DP4726
Authors: Vasco M. Carvalho; Andrew Harvey
Abstract: Multivariate unobserved components (structural) time series models are fitted to annual post-war observations on real income per capita in countries in the euro zone. The aim is to establish stylized facts about convergence as it relates both to long-run income levels and to cycles. The analysis is based on a new model in which convergence components are combined with a common trend and similar cycles. These convergence components are formulated as a second-order error correction mechanism that ensures that the extracted components change smoothly, thereby giving a clearer decomposition into long-run movements and cycles.
Keywords: balanced growth; error correction mechanism; Kalman filter; signal extraction; stochastic trend; unobserved components
JEL Codes: C32; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Convergence components (O47) | long-run income levels (E25) |
| Convergence components (O47) | economic cycles (E32) |
| long-run income levels (E25) | economic cycles (E32) |
| Convergence components (O47) | smoother changes in convergence components (F62) |