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The trend-cycle decomposition of output and the Phillips curve: Bayesian estimates for Italy

Author

Listed:
  • 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 and has two local maxima. A Bayesian estimation of the model identifies output gap and trend components that match the features of the Italian business cycle well. In a bivariate output and Phillips curve model it is found that: (i) the median value of the semi-elasticity of prices to the output gap is 0.5 after 20 quarters, (ii) the inflation cycle lags GDP on average by about 3 quarters.

Suggested Citation

  • Fabio Busetti & Michele Caivano, 2013. "The trend-cycle decomposition of output and the Phillips curve: Bayesian estimates for Italy," Temi di discussione (Economic working papers) 941, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_941_13
    as

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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2013/2013-0941/en_tema_941.pdf
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    References listed on IDEAS

    as
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    6. Canova, Fabio, 1998. "Detrending and business cycle facts," Journal of Monetary Economics, Elsevier, vol. 41(3), pages 475-512, May.
    7. Planas, Christophe & Rossi, Alessandro & Fiorentini, Gabriele, 2008. "Bayesian Analysis of the Output Gap," Journal of Business & Economic Statistics, American Statistical Association, vol. 26, pages 18-32, January.
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    13. Andrew Harvey, 2011. "Modelling the Phillips curve with unobserved components," Applied Financial Economics, Taylor & Francis Journals, vol. 21(1-2), pages 7-17.
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    More about this item

    Keywords

    Bayesian methods; potential output; unobserved components.;

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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