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

  • Charles A. Fleischman
  • John M. Roberts

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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  1. Giannone, Domenico & Reichlin, Lucrezia & Small, David, 2005. "Nowcasting GDP and Inflation: The Real Time Informational Content of Macroeconomic Data Releases," CEPR Discussion Papers 5178, C.E.P.R. Discussion Papers.
  2. Arthur F. Burns & Wesley C. Mitchell, 1946. "Measuring Business Cycles," NBER Books, National Bureau of Economic Research, Inc, number burn46-1, July.
  3. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2003. "What happens after a technology shock?," International Finance Discussion Papers 768, Board of Governors of the Federal Reserve System (U.S.).
  4. Shigeru Fujita, 2011. "Effects of extended unemployment insurance benefits: evidence from the monthly CPS," Working Papers 10-35, Federal Reserve Bank of Philadelphia.
  5. Arabinda Basistha & Richard Startz, 2004. "Measuring the NAIRU with Reduced Uncertainty: A Multiple Indicator-Common Component Approach," Working Papers UWEC-2004-22, University of Washington, Department of Economics.
  6. Justin Weidner & John C. Williams, 2009. "How big is the output gap?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jun12.
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