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A Comparison of Business Cycle Extraction Methods: Application to the UK

Author

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  • Kanya Paramaguru

Abstract

This paper seeks to expand the discussion surrounding the dating of UK business cycles. Two different time-series filters are applied to UK output time-series to investigate what they would imply for the creation of any official recession dates. The NBER has a business cycles dating committee that investigates the dates of turning points in US business cycle providing a consolidation of business cycle dates for the US. There is, at present, no analogous committee or consolidation on UK turning points dates. There is a broad definition adopted in the UK that defines a recession as two or more periods with negative growth. The Office of National Statistics (ONS) uses a series of real GDP (deflated GDP) and then observes two or more periods of negative growth to define a recessions. 2020 has certainly provided an interesting critique to this broad definition, whereby the second quarter of 2020 so a -20 per cent in GDP but then the next quarter recovered by 12 per cent therefore only categorising the first half of 2020 as a recession. However, the decline in economic output within the UK has been more notable than other business cycle recession in recent decades. The aim of this paper is to continue the discussion on defining the turning points of UK business cycles. This study looks at two filters and how they would define UK business cycles. Although the merits of the filters are discussed before being used in estimation. Based on the outcomes of the business cycle dates, the filters that produce the most reasonable results are defined as a better approach. Reasonable approach is defined as one that matches the theory as to how often peaks and troughs can reasonably expected to occur.

Suggested Citation

  • Kanya Paramaguru, 2021. "A Comparison of Business Cycle Extraction Methods: Application to the UK," Economic Statistics Centre of Excellence (ESCoE) Discussion Papers ESCoE DP-2021-19, Economic Statistics Centre of Excellence (ESCoE).
    • Handle: RePEc:nsr:escoed:escoe-dp-2021-19
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    References listed on IDEAS

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    1. James D. Hamilton, 2018. "Why You Should Never Use the Hodrick-Prescott Filter," The Review of Economics and Statistics, MIT Press, vol. 100(5), pages 831-843, December.
    2. Uhlig, H.F.H.V.S. & Ravn, M., 1997. "On Adjusting the H-P Filter for the Frequency of Observations," Discussion Paper 1997-50, Tilburg University, Center for Economic Research.
    3. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
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    Cited by:

    1. Adolfo Rodríguez-Vargas, 2022. "Estimation of Potential Output for Costa Rica. 1995-2021," Notas Técnicas 2203, Banco Central de Costa Rica.

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    Keywords

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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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