Dynamic Factor Models with Time-Varying Parameters: Measuring Changes in International Business Cycles

46 Pages Posted: 22 May 2008

See all articles by Marco Del Negro

Marco Del Negro

Federal Reserve Bank of New York

Chris Otrok

University of Missouri; Federal Reserve Banks - Federal Reserve Bank of St. Louis

Date Written: May 2008

Abstract

We develop a dynamic factor model with time-varying factor loadings and stochastic volatility in both the latent factors and idiosyncratic components. We employ this new measurement tool to study the evolution of international business cycles in the post-Bretton Woods period, using a panel of output growth rates for nineteen countries. We find: 1) statistical evidence of a decline in volatility for most countries, with the timing, magnitude, and source (international or domestic) of the decline differing across countries; 2) some evidence of a decline in business cycle synchronization for Group of Seven (G-7) countries, but otherwise no evidence of changes in synchronization for the sample countries, including European and euro-area countries; and 3) convergence in the volatility of business cycles across countries.

Keywords: Bayesian factor models, time-varying parameters, Great Moderation, international business cycles

JEL Classification: C11, C32, F02

Suggested Citation

Del Negro, Marco and Otrok, Christopher, Dynamic Factor Models with Time-Varying Parameters: Measuring Changes in International Business Cycles (May 2008). FRB of New York Staff Report No. 326, Available at SSRN: https://ssrn.com/abstract=1136163 or http://dx.doi.org/10.2139/ssrn.1136163

Marco Del Negro (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Christopher Otrok

University of Missouri ( email )

118 Professional Building
Columbia, MO 65211
United States

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

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