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The Australian Business Cycle: A Coincident Indicator Approach

In: The Changing Nature of the Business Cycle

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Author Info

  • Christian Gillitzer

    (Reserve Bank of Australia)

  • Jonathan Kearns

    (Reserve Bank of Australia)

  • Anthony Richards

    (Reserve Bank of Australia)

Abstract

This paper constructs coincident indices of Australian economic activity using techniques for estimating approximate factor models with many series, using data that begin in the early 1960s. The resulting monthly and quarterly indices both provide plausible measures of the Australian business cycle. The indices are quite robust to the selection of variables used in their construction, the sample period used in estimation, and the number of factors included. Notably, only a small number of factors is needed to adequately capture the business cycle. The coincident indices provide a much smoother representation of the cycle in economic activity than do standard national accounts measures, especially in the period prior to the early 1980s. Accordingly, they suggest that the marked decline in volatility evident in quarterly Australian GDP growth that occurred up to the 1980s may overstate the reduction in the volatility of economic activity and may at least partially reflect improvements in the measurement of GDP. Because the coincident indices present a smoother perspective of the business cycle in the 1960s and 1970s, they identify fewer recessions in this period than does GDP. Over the past 45 years, the coincident indices locate three recessions – periods when there was a widespread downturn in economic activity; in 1974–1975, 1982–1983 and 1990–1991.

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

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This chapter was published in: Christopher Kent & David Norman (ed.) The Changing Nature of the Business Cycle, Reserve Bank of Australia, pages , 2005.

This item is provided by Reserve Bank of Australia in its series RBA Annual Conference Volume with number acv2005-14.

Handle: RePEc:rba:rbaacv:acv2005-14

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Related research

Keywords: business cycle; factor models; coincident indicator; Australia;

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References

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  1. Adrian Pagan, 1997. "Towards an Understanding of Some Business Cycle Characteristics," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 30(1), pages 1-15.
  2. Paul Cashin & Sam Ouliaris, 2001. "Key Features of Australian Business Cycles," IMF Working Papers 01/171, International Monetary Fund.
  3. Robert Inklaar & Jan Jacobs & Ward Romp, 2004. "Business Cycle Indexes: Does a Heap of Data Help?," Journal of Business Cycle Measurement and Analysis, OECD Publishing,CIRET, vol. 2004(3), pages 309-336.
  4. Stock, James H. & Watson, Mark W., 1999. "Forecasting inflation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 293-335, October.
  5. John Simon, 2001. "The Decline in Australian Output Volatility," RBA Research Discussion Papers rdp2001-01, Reserve Bank of Australia.
  6. Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2003. "The Generalized Dynamic Factor Model. One-Sided Estimation and Forecasting," LEM Papers Series 2003/13, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  7. Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Boston College Working Papers in Economics 440, Boston College Department of Economics.
  8. Jean Boivin & Serena Ng, 2005. "Understanding and Comparing Factor-Based Forecasts," International Journal of Central Banking, International Journal of Central Banking, vol. 1(3), December.
  9. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2004. "Measuring the effects of monetary policy: a factor-augmented vector autoregressive (FAVAR) approach," Finance and Economics Discussion Series 2004-03, Board of Governors of the Federal Reserve System (U.S.).
  10. Gerhard Bry & Charlotte Boschan, 1971. "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs," NBER Books, National Bureau of Economic Research, Inc, number bry_71-1.
  11. Forni, Mario & Reichlin, Lucrezia, 1998. "Let's Get Real: A Factor Analytical Approach to Disaggregated Business Cycle Dynamics," Review of Economic Studies, Wiley Blackwell, vol. 65(3), pages 453-73, July.
  12. Harding, Don, 2002. "The Australian Business Cycle: A New View," MPRA Paper 3698, University Library of Munich, Germany.
  13. Harding, Don & Pagan, Adrian, 2002. "Dissecting the cycle: a methodological investigation," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 365-381, March.
  14. Dan Andrews & Marion Kohler, 2005. "International Business Cycle Co-movements through Time," RBA Annual Conference Volume, in: Christopher Kent & David Norman (ed.), The Changing Nature of the Business Cycle Reserve Bank of Australia.
  15. Lucrezia Reichlin & Mario Forni & Marc Hallin & Marco Lippi, 2001. "Coincident and leading indicators for the Euro area," ULB Institutional Repository 2013/10137, ULB -- Universite Libre de Bruxelles.
  16. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 1999. "The Generalized Dynamic Factor Model: Identification and Estimation," CEPR Discussion Papers 2338, C.E.P.R. Discussion Papers.
  17. Gerhard Bry & Charlotte Boschan, 1971. "Foreword to "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs"," NBER Chapters, in: Cyclical Analysis of Time Series: Selected Procedures and Computer Programs, pages -1 National Bureau of Economic Research, Inc.
  18. Ben S. Bernanke & Jean Boivin, 2001. "Monetary Policy in a Data-Rich Environment," NBER Working Papers 8379, National Bureau of Economic Research, Inc.
  19. Adrian Pagan & Don Harding, 2005. "A suggested framework for classifying the modes of cycle research," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(2), pages 151-159.
  20. Harding, Don & Pagan, Adrian, 2003. "A comparison of two business cycle dating methods," Journal of Economic Dynamics and Control, Elsevier, vol. 27(9), pages 1681-1690, July.
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Citations

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Cited by:
  1. Philip Liu, 2007. "Stabilizing The Australian Business Cycle: Good Luck Or Good Policy?," CAMA Working Papers 2007-24, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Philip Liu, 2008. "The Role of International Shocks in Australia’s Business Cycle," RBA Research Discussion Papers rdp2008-08, Reserve Bank of Australia.

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