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

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  • Pierre Perron

    () (Boston University)

  • Tatsuma Wada

    () (Keio University)

Abstract

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 socalled “stylized facts†about the relative variability of consumption and output across countries.

Suggested Citation

  • Pierre Perron & Tatsuma Wada, 2015. "Measuring Business Cycles with Structural Breaks and Outliers: Applications to International Data," Boston University - Department of Economics - Working Papers Series wp2015-016, Boston University - Department of Economics.
  • Handle: RePEc:bos:wpaper:wp2015-016
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    Cited by:

    1. Steven M. Fazzari & James Morley & Irina B. Panovska, 2017. "When Do Discretionary Changes in Government Spending or Taxes Have Larger Effects?," Discussion Papers 2017-04, School of Economics, The University of New South Wales.
    2. repec:eee:reecon:v:71:y:2017:i:3:p:373-383 is not listed on IDEAS
    3. repec:eee:ecofin:v:42:y:2017:i:c:p:393-420 is not listed on IDEAS

    More about this item

    Keywords

    Trend-Cycle Decomposition; Unobserved Components Model; International Business Cycle; Non Gaussian Filter;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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