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Trends and cycles under changing economic conditions

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  • Cláudia Duarte
  • José R. Maria
  • Sharmin Sazedj

Abstract

The identification of trends and cycles is often a challenging task under sizeable changes in economic conditions. We solve this problem with a flexible unobserved components model, featuring an (unobserved) evolving trend inflation drift to cope with distinct inflationary periods and data-driven low frequency movements to partly influence ex ante key trend components. In the long run the model displays a balanced growth path, in addition to other standard restrictions (e.g. nil output and labour market slacks). We estimate the model with Bayesian techniques using two datasets, one for the euro area and another for Portugal, two economies displaying distinct macroeconomic environments over the last four decades, and conclude that Portugal witnessed (i) a steeper deceleration of potential output, since the 1990s; (ii) a pervasively higher volatility in labour and product markets; and (iii) a long-lived interruption in convergence trends after the 2000s. Results are robust to sensitivity analyses. Parameter uncertainty is, nevertheless, significant.

Suggested Citation

  • Cláudia Duarte & José R. Maria & Sharmin Sazedj, 2019. "Trends and cycles under changing economic conditions," Working Papers w201918, Banco de Portugal, Economics and Research Department.
  • Handle: RePEc:ptu:wpaper:w201918
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    Cited by:

    1. José R. Maria & Paulo Júlio, 2023. "Trends and cycles during the COVID-19 pandemic period," Working Papers w202311, Banco de Portugal, Economics and Research Department.
    2. Ana Filipa Correia & José R. Maria & Vanda G. Cunha & Fernando Heitor & Luis Saramago, 2020. "Exchange Rate Cooperation Agreement between Portugal and Cabo Verde: characterisation, developments and challenges after 20 years," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    3. Sara Serra & João Quelhas, 2023. "The inflation process in Portugal: the role of price spillovers," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    4. Cláudia Duarte & José R. Maria & Sharmin Sazedj, 2021. "Cyclical outputs and structural budget balances," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    5. Cláudia Braz & Maria Manuel Campos, 2021. "Challenges in measuring fiscal effects," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.

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    More about this item

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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