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

See all articles by João Valle e Azevedo

João Valle e Azevedo

Vrije Universiteit Amsterdam, School of Business and Economics

Siem Jan Koopman

Vrije Universiteit Amsterdam - School of Business and Economics; Tinbergen Institute; Aarhus University - CREATES

Antonio Rua

Bank of Portugal - Economic Research Department

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

Valle e Azevedo, João and Koopman, Siem Jan and Rua, Antonio, Tracking Growth and the Business Cycle: A Stochastic Common Cycle Model for the Euro Area (August 27, 2003). Tinbergen Institute Discussion Paper No. 03-069/4, Available at SSRN: https://ssrn.com/abstract=441400 or http://dx.doi.org/10.2139/ssrn.441400

João Valle e Azevedo (Contact Author)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Siem Jan Koopman

Vrije Universiteit Amsterdam - School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31205986019 (Phone)

HOME PAGE: http://sjkoopman.net

Tinbergen Institute ( email )

Gustav Mahlerplein 117
1082 MS Amsterdam
Netherlands

HOME PAGE: http://personal.vu.nl/s.j.koopman

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Antonio Rua

Bank of Portugal - Economic Research Department ( email )

R. do Ouro, 27
Lisboa, 1100-150
Portugal

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