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The Australian Business Cycle: A Coincident Indicator Approach

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Author Info
Christian Gillitzer (Reserve Bank of Australia)
Jonathan Kearns (Reserve Bank of Australia)
Anthony Richards (Reserve Bank of Australia)

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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.

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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2005-07.

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Date of creation: Oct 2005
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Handle: RePEc:rba:rbardp:rdp2005-07

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

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  3. Forni, Mario & Reichlin, Lucrezia, 1998. "Let's Get Real: A Factor Analytical Approach to Disaggregated Business Cycle Dynamics," Review of Economic Studies, Blackwell Publishing, vol. 65(3), pages 453-73, July. [Downloadable!] (restricted)
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  5. Bernanke, Ben S. & Boivin, Jean, 2003. "Monetary policy in a data-rich environment," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 525-546, April. [Downloadable!] (restricted)
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  6. John Simon, 2001. "The Decline in Australian Output Volatility," RBA Research Discussion Papers rdp2001-01, Reserve Bank of Australia. [Downloadable!]
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  10. Jean Boivin & Serena Ng, 2003. "Are More Data Always Better for Factor Analysis?," NBER Working Papers 9829, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Christian Gillitzer & Jonathan Kearns & Anthony Richards, 2005. "The Australian Business Cycle: A Coincident Indicator Approach," RBA Annual Conference Volume, in: Christopher Kent & David Norman (ed.), The Changing Nature of the Business Cycle Reserve Bank of Australia. [Downloadable!]
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  12. Forni, Mario, et al, 2001. "Coincident and Leading Indicators for the Euro Area," Economic Journal, Royal Economic Society, vol. 111(471), pages C62-85, May. [Downloadable!] (restricted)
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  14. Harding, Don & Pagan, Adrian, 2002. "Dissecting the cycle: a methodological investigation," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 365-381, March. [Downloadable!] (restricted)
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  15. Harding, Don, 2002. "The Australian Business Cycle: A New View," MPRA Paper 3698, University Library of Munich, Germany. [Downloadable!]
  16. Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2000. "The Generalized Dynamic-Factor Model: Identification And Estimation," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 540-554, November. [Downloadable!] (restricted)
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  17. Ben Bernanke & Jean Boivin & Piotr S. Eliasz, 2005. "Measuring the Effects of Monetary Policy: A Factor-augmented Vector Autoregressive (FAVAR) Approach," The Quarterly Journal of Economics, MIT Press, vol. 120(1), pages 387-422, January.
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  18. Paul Cashin & Sam Ouliaris, 2004. "Key Features of Australian Business Cycles," Australian Economic Papers, Blackwell Publishing, vol. 43(1), pages 39-58, 03. [Downloadable!] (restricted)
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  19. Altissimo, Filippo & Bassanetti, Antonio & Cristadoro, Riccardo & Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia & Veronese, Giovanni, 2001. "EuroCOIN: A Real Time Coincident Indicator of the Euro Area Business Cycle," CEPR Discussion Papers 3108, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  20. Inklaar, Robert & Jacobs, Jan & Romp, Ward, 2003. "Business cycle indexes: does a heap of data help?," CCSO Working Papers 200312, University of Groningen, CCSO Centre for Economic Research. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Chris Heaton & Victor Solo, 2006. "Estimation of Approximate Factor Models: Is it Important to have a Large Number of Variables?," Research Papers 0605, Macquarie University, Department of Economics. [Downloadable!]
  2. Christian Gillitzer & Jonathan Kearns & Anthony Richards, 2005. "The Australian Business Cycle: A Coincident Indicator Approach," RBA Research Discussion Papers rdp2005-07, Reserve Bank of Australia. [Downloadable!]
    Other versions:
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