Business cycle trends, cycles and growth revisited: With applications to G7 economies

This paper examines the behaviour of G7 economies and decomposes their GDP into trend and cycle components using the Kalman filter. The general model of the paper encompasses a number of alternative specifications about trend growth, therefore accommodating diverse views on growth. The business cycle characteristics of G7 economies are then discussed, compared and deliberated in this framework. The empirical results overwhelmingly favor a mean-reverting stochastic process for the growth rate, the general and unrestricted specification of the paper, across G7 countries, though the restrictions are statistically rejected in less than half of the cases. Further reflection on the properties of cycles makes the specifications and the results of this study more reasonable in capturing the characteristics of GDP series, and contributes to solving the controversies in model specifications in some previous studies.