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From many series, one cycle: improved estimates of the business cycle from a multivariate unobserved components model

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  • Charles A. Fleischman
  • John M. Roberts

Abstract

We construct new estimates of potential output and the output gap using a multivariate approach that allows for an explicit role for measurement errors in the decomposition of real output. Because we include data on hours, output, employment, and the labor force, we are able to decompose our estimate of potential output into separate trends in labor productivity, labor-force participation, weekly hours, and the NAIRU. We find that labor-market variables—especially the unemployment rate—are the most informative individual indicators of the state of the business cycle. Conditional on including these measures, inflation is also very informative. Among measures of output, we find that although they add little to the identification for the cycle, the income-side measures of output are about as informative as the traditional product-side measures about the level of structural productivity and potential output. We also find that the output gap resulting from the recent financial crisis was very large, reaching -7 percent of output in the second half of 2009.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2011-46.

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Date of creation: 2011
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Handle: RePEc:fip:fedgfe:2011-46
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Keywords: Business cycles - United States ; Labor productivity - Econometric models;

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  1. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2003. "What Happens After a Technology Shock?," NBER Working Papers 9819, National Bureau of Economic Research, Inc.
  2. Domenico Giannone & Lucrezia Reichlin & David H. Small, 2005. "Nowcasting GDP and inflation: the real-time informational content of macroeconomic data releases," Finance and Economics Discussion Series 2005-42, Board of Governors of the Federal Reserve System (U.S.).
  3. Arabinda Basistha & Richard Startz, 2005. "Measuring the NAIRU with Reduced Uncertainty: A Multiple Indicator-Common Component Approach," Computing in Economics and Finance 2005 46, Society for Computational Economics.
  4. Arthur F. Burns & Wesley C. Mitchell, 1946. "Measuring Business Cycles," NBER Books, National Bureau of Economic Research, Inc, number burn46-1, May.
  5. Justin Weidner & John C. Williams, 2009. "How big is the output gap?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jun12.
  6. Shigeru Fujita, 2011. "Effects of extended unemployment insurance benefits: evidence from the monthly CPS," Working Papers 10-35, Federal Reserve Bank of Philadelphia.
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Cited by:

  1. Juan Antolin-Diaz & Thomas Drechsel & Ivan Petrella, 2014. "Tracking the Slowdown in Long-Run GDP Growth," Discussion Papers 1604, Centre for Macroeconomics (CFM), revised Jan 2016.
  2. Regis Barnichon & Christopher J. Nekarda, 2012. "The Ins and Outs of Forecasting Unemployment: Using Labor Force Flows to Forecast the Labor Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 45(2 (Fall)), pages 83-131.
  3. John G. Fernald, 2015. "Productivity and Potential Output before, during, and after the Great Recession," NBER Macroeconomics Annual, University of Chicago Press, vol. 29(1), pages 1 - 51.
  4. Christopher L. Foote & Richard W. Ryan, 2015. "Labor Market Polarization Over the Business Cycle," NBER Working Papers 21030, National Bureau of Economic Research, Inc.
  5. Jeffrey R. Campbell & Jonas D. M. Fisher & Alejandro Justiniano & Leonardo Melosi, 2016. "Forward Guidance and Macroeconomic Outcomes Since the Financial Crisis," NBER Chapters, in: NBER Macroeconomics Annual 2016, Volume 31 National Bureau of Economic Research, Inc.
  6. Antolin-Diaz, Juan & Drechsel, Thomas & Petrella, Ivan, 2014. "Following the Trend: Tracking GDP when Long-Run Growth is Uncertain," CEPR Discussion Papers 10272, C.E.P.R. Discussion Papers.

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