Output Fluctuations in the G-7: An Unobserved Components Approach

Abstract

This paper proposes a multivariate unobserved components model to simultaneously decompose the real GDP for each of the G-7 countries into their respective trend and cycle components. In contrast to previous literature, our model allows for explicit correlation between all the contemporaneous trend and cycle shocks. We find that all the G-7 countries have highly variable stochastic permanent components for output, even once we allow for structural breaks. We also find that common restrictions on the correlations between trend and cycle shocks are rejected by the data. In particular, we find that correlations across permanent and transitory shocks are important both within and across countries. † Corresponding author: tsinc@gwu.edu. The authors wish to thank

The German unemployment since the Hartz reforms: Permanent or transitory fall?

“…Both Models (1) and (2) found that the correlation O F G I G between the permanent and transitory components of real GDP is strongly negative: -0.823 in Model (2). This pattern is consistent with other studies that have examined correlation between trend and cycle using correlated unobserved components models [Morley et al (2003), Morley (2007), Sinclair (2009), Mitra and Sinclair (2012)]. …”

Identifying the Substitution Effect of Temporary Agency Employment

“…2. On the importance of correlation between structural latent terms, see also the unobserved components literature, e.g., Weber (2011) or Mitra and Sinclair (2012).…”

Forecasting output gaps in the G-7 countries: the role of correlated innovations and structural breaks

“…Therefore we apply the Bai-Perron algorithm for detecting and dating break dates Perron, 1998, 2003) to the mean of the growth rate of real GDP. Several studies have taken this simple route to detect structural breaks in the drift of the unobserved trend, see for example, Basistha and Nelson (2007) and Mitra and Sinclair (2012).…”