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Measuring Business Cycles with Structural Breaks and Outliers: Applications to International Data

Listed author(s):
  • Tatsuma Wada

    (Wayne State University)

  • Pierre Perron

    (Boston University)

This paper first generalizes the trend-cycle decomposition framework of Perron and Wada (2009) based on unobserved components models with innovations having a mixture of normals distribution, which is able to handle sudden level and slope changes to the trend function as well as outliers. We investigate how important are the differences in the implied trend and cycle compared to the popular decomposition based on the Hodrick and Prescott (HP) (1997) filter. Our results show important qualitative and quantitative differences in the implied cycles for both real GDP and consumption series for the G7 countries. Most of the differences can be ascribed to the fact that the HP filter does not handle well slope changes, level shifts and outliers, while our method does so. Then, we reassess how such different cycles affect some so- called “stylized facts†about the relative variability of consumption and output across countries.

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File URL: http://www.bu.edu/econ/files/2009/07/Perron-Measuring-Business-Cycles-Feb-2014.pdf
File Function: First version, 2014
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Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number 2014-004.

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Length: 48
Date of creation: Apr 2014
Handle: RePEc:bos:wpaper:wp2014-004
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