A nonlinear look at trend MFP growth and the business cycle: result from a hybrid Kalman/Markov switching model
AbstractThe cycle in output and hours worked is not symmetric: it behaves differently around recessions than in expansions. Similarly, the trend in multifactor productivity (MFP) seems to pass through different regimes; there was an extended period of slow MFP growth from about 1973 through 1995, and faster growth thereafter. Typical linear models and linear filters such as the Kalman filter deal poorly with asymmetry and regime changes. This paper attempts to determine more accurately and quickly any shifts in trend MFP growth, using a nonlinear Kalman/Markov filter with a model of the unobserved components of output and hours. This hybrid model incorporates regime-switching in the business cycle and in the trend growth of MFP. Estimation results are promising. The hybrid model and associated filter appear to be faster than the basic Kalman filter in detecting turning points in the smoothed conditional mean estimate of trend MFP growth; in addition, the hybrid model avoids some of the Kalman filter's biases in reconstructing historical business cycles and the MFP trend.
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Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2005-12.
Date of creation: 2005
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-05-23 (All new papers)
- NEP-ETS-2005-05-23 (Econometric Time Series)
- NEP-MAC-2005-05-23 (Macroeconomics)
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