Common Trends and Common Cycles in Canada: Who Knew So Much Has Been Going On?

Elizabeth C. Wakerly, Byron G. Scott, and James M. Nason
Working Paper 2004-5a
Revised March 2005

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It is generally accepted that convergence is well established for Canadian regional per capita outputs. Another prevalent belief is that the Canadian regions respond symmetrically to the same aggregate shocks. We present a common trends-common cycles decomposition of Canadian regional outputs that casts doubt on the convergence hypothesis and reveals that trend shocks dominate fluctuations in Ontario, Quebec, and the Maritimes in the short run and long run but not in British Columbia and the Prairies. Thus, Canadian regional output fluctuations are driven by a rich, asymmetric, and economically important set of disaggregate propagation and growth mechanisms. The paper also reports that the Canadian regional trends and cycles are most related to the economic primitives of preferences and technology. Our results point to a new Canadian macroeconomic research agenda.

JEL classification: C32, E32, O47

Key words: common trends, common cycles, long-run convergence, disaggregate fluctuations

The authors thank the co-editor, John Galbraith, for his patience and two anonymous referees for their comments. Tiff Macklem, Marco Del Negro, and Juan Rubio-Ramírez provided useful discussions. They also gratefully acknowledge Jeremy Rudin for supplying the equalization entitlement data, Tiff Macklem for his updated time series of Canadian aggregate human wealth, and Takashi Kano for access to the regional sectorial GDP and employment data. E.C. Wakerly acknowledges funding from the Faculty Research Program of the government of Canada. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to Elizabeth C. Wakerly, School of Economics, University of East Anglia,; Byron G. Scott, Department of Economics, University of Wisconsin, Madison,; or James M. Nason, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8891, 404-498-8956 (fax),