May I kindly ask about the correlation between components of GDP (simulated in Dynare).
For a simple model with equilibrium condition,
Y = C + I + G (and even for complex models), one can deduce from the IRFs whether the simulated series (
C, I, G) will be procyclical or countercyclical (with respect to output). However, I have not been able to do the same for correlations between the components of
Y (i.e., C, I, G).
C and I are both procyclical (with respect to output) but the correlation between
C and I is either positive or negative.
Actually, this also true in actual data. For some economies, there is a positive co-movement between
C and I, with both
C and I being procyclical (with respect to output). In other economies, there is a negative correlation between
C and I, although
C and I are both procyclical.
Jespersen & Madsen (2013) have called the correlation between
C and I (which can go either ways in actual data) a paradox since theory predicts that
C and I should move in opposite directions.
Is this paradox somehow embedded in dynare such that correlation between, for example, simulated
C and I is arbitrary, and hence can either be negative or positive?
My instinct tells me it is not arbitrary, but I have not been able to see that from other parts or other results of the model.
Any help to clarify this is very well appreciated. Many thanks!!!