From Many Series, One Cycle: Improved Estimates of the Business Cycle from a Multivariate Unobserved Components Model

41 Pages Posted: 10 Nov 2011

See all articles by Charles A. Fleischman

Charles A. Fleischman

Federal Reserve Board - Macroeconomic Analysis Section

John M. Roberts

Board of Governors of the Federal Reserve System

Date Written: October 18, 2011

Abstract

We construct new estimates of potential output and the output gap using a multivariate approach that allows for an explicit role for measurement errors in the decomposition of real output. Because we include data on hours, output, employment, and the labor force, we are able to decompose our estimate of potential output into separate trends in labor productivity, labor-force participation, weekly hours, and the NAIRU. We find that labor-market variables — especially the unemployment rate — are the most informative individual indicators of the state of the business cycle. Conditional on including these measures, inflation is also very informative. Among measures of output, we find that although they add little to the identification for the cycle, the income-side measures of output are about as informative as the traditional product-side measures about the level of structural productivity and potential output. We also find that the output gap resulting from the recent financial crisis was very large, reaching -7 percent of output in the second half of 2009.

Keywords: Business cycles, output gap, potential output, state-space model, Kalman filter, NAIRU, measurement error

JEL Classification: E32, O40, E24, C32

Suggested Citation

Fleischman, Charles A. and Roberts, John M., From Many Series, One Cycle: Improved Estimates of the Business Cycle from a Multivariate Unobserved Components Model (October 18, 2011). FEDS Working Paper No. 2011-46. Available at SSRN: https://ssrn.com/abstract=1957379 or http://dx.doi.org/10.2139/ssrn.1957379

Charles A. Fleischman (Contact Author)

Federal Reserve Board - Macroeconomic Analysis Section ( email )

20th & C. St., N.W.
Mailstop 80
Washington, DC 20551
United States
202-452-6473 (Phone)

John M. Roberts

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-452-2946 (Phone)

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