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The trend–cycle decomposition of output and the Phillips curve: Bayesian estimates for Italy and the Euro area

Listed author(s):
  • Fabio Busetti

    ()

    (Bank of Italy)

  • Michele Caivano

    ()

    (Bank of Italy)

Abstract A standard model-based trend–cycle decomposition of Italian GDP yields a likelihood function that is relatively flat. Bayesian estimation of the model allows to impose a mildly informative prior on the parameter governing the periodicity of the cycle, and thus, it helps to achieve the preferred decomposition. In a bivariate output and Phillips curve model for Italy, it is found that (i) the median response of prices to a 1 % shock to the output gap is equal to about 0.5 % after 20 quarters, (ii) the inflation cycle lags GDP on average by about three quarters. Estimating the model with Euro area data provides evidence of a smaller impact of the output gap on prices (0.4 %) and a lower lag of the inflation cycle with respect to GDP.

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File URL: http://link.springer.com/10.1007/s00181-015-0982-3
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Article provided by Springer in its journal Empirical Economics.

Volume (Year): 50 (2016)
Issue (Month): 4 (June)
Pages: 1565-1587

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Handle: RePEc:spr:empeco:v:50:y:2016:i:4:d:10.1007_s00181-015-0982-3
DOI: 10.1007/s00181-015-0982-3
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Order Information: Web: http://www.springer.com/economics/econometrics/journal/181/PS2

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