Aggregate Output Measurements: A Common Trend Approach

38 Pages Posted: 26 Mar 2021

See all articles by Martin Almuzara

Martin Almuzara

Federal Reserve Banks - Federal Reserve Bank of New York

Gabriele Fiorentini

Universita di Firenze - Dipartimento di Statistica

Enrique Sentana

Centro de Estudios Monetarios y Financieros (CEMFI); Financial Markets Group; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2021

Abstract

We analyze a model for N different measurements of a persistent latent time series when measurement errors are mean-reverting, which implies a common trend among measurements. We study the consequences of overdifferencing, finding potentially large biases in maximum likelihood estimators of the dynamics parameters and reductions in the precision of smoothed estimates of the latent variable, especially for multiperiod objects such as quinquennial growth rates. We also develop an R2 measure of common trend observability that determines the severity of misspecification. Finally, we apply our framework to U.S. quarterly data on GDP and GDI, obtaining an improved aggregate output measure.

Keywords: cointegration, GDP, GDI, overdifferencing, signal extraction

JEL Classification: C32, E01

Suggested Citation

Almuzara, Martin and Fiorentini, Gabriele and Sentana, Enrique, Aggregate Output Measurements: A Common Trend Approach (March 2021). FRB of New York Staff Report No. 962, Available at SSRN: https://ssrn.com/abstract=3812546 or http://dx.doi.org/10.2139/ssrn.3812546

Martin Almuzara (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Gabriele Fiorentini

Universita di Firenze - Dipartimento di Statistica ( email )

Viale Morgagni, 59
50134 Firenze
Italy
+39 055 4237 274 (Phone)
+39 055 4223 560 (Fax)

Enrique Sentana

Centro de Estudios Monetarios y Financieros (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
Spain
+34 91 429 0551 (Phone)
+34 91 429 1056 (Fax)

HOME PAGE: http://www.cemfi.es/~sentana/

Financial Markets Group

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

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