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A trend-cycle decomposition with hysteresis

Author

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  • Javier G. Gómez-Pineda
  • Julián Roa-Rozo

Abstract

The business cycle is the cycle in the output gap and also in a stationary measure of trend output. Both the output gap and trend output are driven by joint trend-cycle shocks. The model is a univariate trend-cycle decomposition with hysteresis in trend output that enables the estimation of the output gap and trend output in 81 economies in quarterly frequency, since 1995Q1; and 184 economies in yearly frequency, in several cases since 1950, and in a few cases since 1820. Volatility and dispersion, as well as the frequency of large joint trend-cycle shocks, were low during the Gilded Age period; high during the interwar period, even more so in advanced (AD) economies compared to emerging market and developing economies (EMDE); and low in AD economies and high in EMDE economies in the post WWII period. In contrast with other existing estimates of trend output, those from the trend-cycle decomposition with hysteresis do not evolve smoothly, do not result in an artificial boom before recessions and are less sensitive to new data. **** RESUMEN: El ciclo económico es el ciclo en la brecha del producto y también en una medida estacionaria del producto tendencial. Tanto la brecha del producto como el producto tendencial son impulsados por choques conjuntos al ciclo y la tendencia. El modelo es una descomposición ciclo tendencia univariada con histéresis en el producto tendencia que permite la estimación de la brecha del producto y el producto tendencial en 81 economías en frecuencia trimestral desde 1995Q1 y en 184 economías en frecuencia anual desde 1975. La volatilidad, dispersión y frecuencia de choques conjuntos grandes fueron bajos durante el período de la Época Dorada; altos durante el período entre guerras, aún más en economías avanzadas (AD) en comparación con las emergentes y en desarrollo (EMDE); y bajo en las economías AD y alto en las economías EMDE en la segunda postguerra. En contraste con otros estimativos existentes del producto tendencial, los de la descomposición tendencia-ciclo con histéresis no evolucionan de forma suave, no resultan en un boom artificial antes de las recesiones y son menos sensibles a los datos nuevos.

Suggested Citation

  • Javier G. Gómez-Pineda & Julián Roa-Rozo, 2023. "A trend-cycle decomposition with hysteresis," Borradores de Economia 1230, Banco de la Republica de Colombia.
    • Handle: RePEc:bdr:borrec:1230
    DOI: 10.32468/be.1230
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    More about this item

    Keywords

    Hysteresis; Business cycles; Business Fluctuations; Univariate model; Trend-cycle decomposition; Trend output; Output gap; Potential output; Histéresis; Ciclo de los negocios; Fluctuaciones económicas; Modelo univariado; Descomposición tendencia ciclo; Producto tendencial; Brecha del producto; Producto potencial;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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