Tracking Growth and the Business Cycle: A Stochastic Common Cycle Model for the Euro Area
Tinbergen Institute Discussion Paper No. 03-069/4
24 Pages Posted: 17 Nov 2003
Date Written: August 27, 2003
Abstract
This paper proposes a new model-based method to obtain a coincident indicator for the business cycle. A dynamic factor model with trend components and a common cycle component is considered which can be estimated using standard maximum likelihood methods. The multivariate unobserved components model includes a stationary higher order cycle. Also, higher order trends can be part of the analysis. These generalisations lead to a business cycle that is similar to a band-pass one. Furthermore, cycle shifts for individual time series are incorporated within the model and estimated simultaneously with the remaining parameters. This feature permits the use of leading, coincident and lagging variables to obtain the business cycle coincident indicator without prior analysis of their lead-lag relationship. Besides the business cycle indicator, the model-based approach also allows to get a growth rate indicator. In the empirical analysis for the Euro area, both indicators are obtained based on nine key economic time series including gross domestic product, industrial production, unemployment, confidence indicators and interest rate spread. This analysis contrasts sharply with earlier multivariate approaches. In particular, our more parsimonious approach leads to a growth rate indicator for the Euro area that is similar to the one of EuroCOIN. The latter is based on a more involved approach by any standard and uses hundreds of time series from individual countries belonging to the Euro area.
JEL Classification: C13, C32, E32
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
The Generalized Dynamic Factor Model: One-Sided Estimation and Forecasting
By Mario Forni, Marc Hallin, ...
-
Arbitrage, Factor Structure, and Mean-Variance Analysis on Large Asset Markets
-
By James H. Stock and Mark W. Watson
-
Monetary Policy in a Data-Rich Environment
By Ben S. Bernanke and Jean Boivin
-
Eurocoin: A Real Time Coincident Indicator of the Euro Area Business Cycle
By Filippo Altissimo, Antonio Bassanetti, ...
-
Are More Data Always Better for Factor Analysis?
By Jean Boivin and Serena Ng
-
Implications of Dynamic Factor Models for VAR Analysis
By James H. Stock and Mark W. Watson
-
By Domenico Giannone, Lucrezia Reichlin, ...
-
By Domenico Giannone, Lucrezia Reichlin, ...