Measuring business cycles: A wavelet analysis of economic time series

Multiresolution wavelet analysis is a natural way to decompose an economic time series into trend, cycle, and noise. The method is illustrated with GDP data. The business-cycle component of the wavelet-filtered series closely resembles the series filtered by the approximate bandpass filter.     

Measuring business cycles: A temporal disaggregation model with regime switching

In this paper, we propose a temporal disaggregation model with regime switches to disaggregate U.S. quarterly GDP into monthly figures. Alternative to the existing literature, our model is able to capture the nonlinear behaviors of both aggregated and disaggregated output series as well as the asymmetric nature of business cycle phases. To demonstrate the applicability of the proposed model, we apply the model with a Markov trend component to U.S. quarterly real GDP. The results suggest that the combination of a temporal disaggregation model with Markov switches leads to a successful representation of the data relative to the existing literature. Also, the inferred probabilities of unobserved states are clearly in close agreement with the NBER reference cycle on a monthly basis, which highlights the importance of nonlinearities in business cycle.     

Modelling economic growth with internal and external imbalances: Empirical evidence from Portugal

Thirlwall's Law considers that growth can be constrained by the balance-of-payments when the current account is in permanent deficit. The Law focuses on external imbalances as impediments to growth and does not consider the case where internal imbalances (budget deficits or public debt) can also constrain growth. The recent European public debt crisis shows that when internal imbalances are out of control they can constrain growth and domestic demand in a severe way. The aim of this paper is to fill this gap by developing a growth model in line with Thirlwall's Law that takes into account both internal and external imbalances. The model is tested for Portugal which recently fell into a public debt crisis with serious negative consequences on growth. The empirical analysis shows that the growth rate in Portugal is in fact balance-of-payments constrained and the main drawback is the high import elasticity of the components of demand and in particular that of exports.     

Investment-specific shocks and real business cycles in emerging economies: Evidence from Brazil

This paper investigates the role of the RBC (Real Business Cycle) model with investment-specific technology shocks in explaining business cycle fluctuations in Brazil. I consider the role of transitory and permanent components of neutral and investment-specific technology shocks. I fit the model to the data using Bayesian techniques to show that the investment-specific shocks are important sources of fluctuations in the estimated model. In fact, in the context of the model, investment-specific shocks can account for remarkable percentages of fluctuations in consumption growth, GDP growth, investment growth and trade balance to GDP ratio. Furthermore, I present simulation evidence showing that the RBC model cannot account for some important features of the data.     

Expectation driven business cycles with limited enforcement

We explore shocks to expected future productivity in a model with limited enforcement of financial contracts. A microfounded collateral constraint implies that good news about future productivity yield an increase in stock prices, available credit and a general economic expansion.     

Measuring major and minor cycles in univariate economic time series

The coexistence of cycles with different periods complicates the assessment of the current macroeconomic conditions. In order to overcome this problem, a modeling of multiple autoregressive processes in a univariate time series is presented. In the proposed model, individual autoregressive processes are assumed to be mutually uncorrelated, and the number of individual autoregressive processes is determined using information criteria. Simulation results show that the proposed procedure is sufficiently applicable for measuring major and minor cycles. Empirical applications suggest the usefulness and limitations of the proposed method.     

Does seasonality change over the business cycle? An investigation using monthly industrial production series

This paper examines the proposition that the business cycle affects seasonality in industrial production, with output being switched to the traditionally low production summer months when recent (annual) growth has been strong. This is investigated through the use of a restricted threshold autoregressive model for the monthly growth rate in a total of 74 industries in 16 OECD countries. Approximately one-third of the series exhibit significant nonlinearity, with this nonlinearity predominantly associated with changes in the seasonal pattern. Estimates show that the summer slowdown in many European countries is substantially reduced in the regime of higher recent growth.     

Using the Haar wavelet transform in the semiparametric specification of time series

Using theoretical arguments for nonparametric wavelet estimation, we devise regression-based semiparametric wavelet estimators to dissect linear from nonlinear effects in a time series. The wavelet estimators localize in both time and frequency so that distortion due to outliers is lessened. Our regression-based approach also lends itself to ease of replication, clarity, flexibility, timeliness and statistical validity. We demonstrate the efficacy of the approach via rolling regressions on time series of quarterly U.S. GDP growth rates, monthly Hong Kong/ U.S. exchange rates, weekly 1-month commercial interest rates and daily returns on the S&P 500.     

International business cycles and the relative price of investment goods

Abstract Is the relative price of investment goods a good proxy for investment specific technology? We model this relative price in a flexible price international economy with two fundamental shocks, namely, the total factor productivity (TFP) shock and the investment‐specific technology (IST) shock. We show that the one‐to‐one correspondence between the IST shock and the relative price of investment goods breaks down in an international economy because of the short‐run correlation between the terms of trade and the relative price of investment goods. The data congruent negative correlation between the investment rate and the relative price of investment goods thus does not necessarily reflect decline in investment frictions (rise in IST), as suggested by many studies. A calibration experiment with the US data demonstrates that such an inverse relation between rate of investment and the relative price of investment goods basically reflects the positive effect of TFP on the terms of trade for a broad range of economies where the home bias in consumption exceeds investment and there is a sizable adjustment cost of investment.     

Common factors in Latin America's business cycles

We develop a common factor approach to reconstruct new business cycle indices for Argentina, Brazil, Chile, and Mexico (“LAC-4”) from a new dataset spanning 135 years. We establish the robustness of our indices through extensive testing and use them to explore business cycle properties in LAC-4 across outward- and inward-looking policy regimes. We find that output persistence in LAC-4 has been consistently high across regimes, whereas volatility has been markedly time-varying but without displaying a clear-cut relationship with openness. We also find a sizeable common regional factor driven by output and interest rates in advanced countries, including during inward-looking regimes.     

Trends and cycles under changing economic conditions

The identification of trends and cycles is often a challenging task under sizeable changes in economic conditions. Business cycles have unique features, varying in duration, intensity and across countries. We propose an unobserved components model with flexible product and labour market equations to cope with evolving economic conditions, namely time-varying inflation processes and labour share trends. Moreover, we augment the information set with data-driven low-frequency movements in real variables before initiating a joint estimation of all unobserved components. We use the same model to establish an international comparison between the euro area and Portugal covering 40 years of data. We conclude that Portugal witnessed (i) a steeper potential output deceleration since the 1990s, driven initially by productivity and afterwards also by the labour and capital inputs; (ii) a pervasively higher volatility in labour and product markets; and (iii) a long-lived interruption in convergence trends after the 2000s.     

An analysis of the informational content of New Zealand data releases: The importance of business opinion surveys

We examine the informational content of New Zealand data releases using a parametric dynamic factor model estimated with unbalanced real-time panels of quarterly data. The data are categorised into 21 different release blocks, allowing us to make 21 different factor model forecasts each quarter. We compare three of these factor model forecasts for real GDP growth, CPI inflation, non-tradable CPI inflation, and tradable CPI inflation with three different real-time forecasts made by the Reserve Bank of New Zealand each quarter. We find that, at some horizons, the factor model produces forecasts of similar accuracy to the Reserve Bank's forecasts. Analysing the marginal value of each of the data releases reveals the importance of the business opinion survey data—the Quarterly Survey of Business Opinion and the National Bank's Business Outlook survey—in determining how factor model predictions, and the uncertainty around those predictions, evolve through each quarter.     

Measuring stress in money markets: A dynamic factor approach

We extract an index of interest rate spreads from various money market segments to assess the level of funding stress in real time. We find that during the 2007–2009 financial crisis, money markets switched between low and high stress regimes except for brief periods of extreme stress. Transitions to lower stress regimes are typically associated with the non-standard policy measures by the Federal Reserve.     

Forecasting Canadian time series with the New Keynesian model

Abstract.  This paper assesses the out-of-sample forecasting accuracy of the New Keynesian Model for Canada. We estimate a variant of the model on a series of rolling subsamples, computing out-of-sample forecasts one to eight quarters ahead at each step. We compare these forecasts with those arising from vector autoregression (VAR) models, using econometric tests of forecasting accuracy. We show that the forecasting accuracy of the New Keynesian Model compares favourably with that of the benchmarks, particularly as the forecasting horizon increases. These results suggest that the model could become a useful forecasting tool for Canadian time series.     

Fiscal policy and the Spanish business cycle

A main result of the RBC literature is that technological factors drive fluctuations of macroeconomic variables around its long-run growth path. Nevertheless, it has been shown that in some countries fluctuations of some fiscal variables may explain some of the business cycle fluctuations. In this paper I show that a result of this sort can be obtained for the Spanish economy. Specifically, I use both technological and fiscal shocks to reproduce the observed volatility of hours of work to output, hours of work to average productivity, and the negative correlation between hours and average productivity.     

Stabilizing and destabilizing mechanisms: A new perspective to understand business cycles

Economists believe that economic fluctuations can be smoothed by stabilization mechanisms, such as price adjustment, embedded in the economy. While price adjustment can be seen as a stabilization mechanism, are there mechanisms that can destabilize an economy? We find that as early as 1939, Harrod discussed a destabilization mechanism, the firm's investment adjustment, illustrated in his knife-edge puzzle. We build a macro-dynamic model with investment and price as the core macroeconomic variables. Our analysis shows that the interaction between the stabilization mechanism (price adjustment) and the destabilization mechanism (investment adjustment) generates fluctuations and cycles. However, due to price stickiness, the price adjustment mechanism may not be enough to stabilize the economy. In this case, a government stabilization policy is necessary for further stabilization. As this paper also addresses the microfoundations of Keynesian quantity theory, including the choice of output and investment in optimization, it can be related to traditional Keynesian economics, with a new perspective to understand business cycles.     

Measuring the cost of economic fluctuations with preferences that rationalize the equity premium

Abstract Lucas (2003) argues that the potential welfare gains from stabilizing the business cycle are small. In fact, he shows that the benefits of eliminating all economic fluctuations are small, especially when compared with the potential gains from other reforms. His estimates are obtained using standard preferences. I show that a model consistent with observed data on asset returns leads to very different conclusions. Calibrating preferences to observed asset market data raises the estimated welfare gains from completely eliminating aggregate fluctuations by approximately two orders of magnitude. Most of the gains, however, come from the elimination of low‐frequency contributions.     

Measuring Monetary Policy in Germany: A Structural Vector Error Correction Approach

Abstract. A structural vector error correction (SVEC) model is used to investigate several monetary policy issues. While being data-oriented the SVEC framework allows structural modeling of the short-run and long-run properties of the data. The statistical model is estimated with monthly German data for 1975–98 where a structural break is detected in 1984. After splitting the sample, three stable long-run relations are found in each subsample which can be interpreted in terms of a money-demand equation, a policy rule and a relation for real output, respectively. Since the cointegration restrictions imply a particular shape of the long-run covariance matrix this information can be used to distinguish between permanent and transitory innovations in the estimated system. Additional restrictions are introduced to identify a monetary policy shock.     

International transmission of business cycles: Evidence from dynamic correlations

We exploit dynamic correlations to estimate determinants of output comovement between OECD countries. Trade intensity, financial integration, and specialization patterns have significantly different effects on comovements at different frequencies. This sheds more light on previous results based on statistical filters.     

Tracking the US business cycle with a singular spectrum analysis

In this paper we resort to singular spectrum analysis to disentangle the US GDP into several underlying components of interest. The business cycle indicator yielded through this method is shown to bear a resemblance with band-pass filtered output, and our results suggest it possesses better revision performance than other commonly applied filters.