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A multivariate unobserved components model of cyclical activity

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    This paper presents results from the estimation of a multivariate unobserved components model of cyclical activity. The model is motivated by a desire to let the data speak as much as possible, and hence to avoid imposing ad hoc and unjustifiable assumptions about trends and cycles. Estimated over the period 1970:1 to 1999:3 via the Kalman filter and maximum likelihood, the model identifies a common, trend-reverting component to real output, unemployment and capacity utilisation. The structure of the model allows an interesting factor interpretation to be put on the estimate of the output gap. These estimates are consistent with priors, but there is no consistent match to any one simple smoother such as the HP filter.

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    File URL: http://www.rbnz.govt.nz/research_and_publications/discussion_papers/2000/dp00_4.pdf
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    Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2000/04.

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    Length: 27p
    Date of creation: Jan 2000
    Date of revision:
    Handle: RePEc:nzb:nzbdps:2000/04
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    Web page: http://www.rbnz.govt.nz
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    1. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. C. John McDermott & David T. Coe, 1996. "Does the Gap Model Work in Asia?," IMF Working Papers 96/69, International Monetary Fund.
    3. Harvey, A C & Jaeger, A, 1993. "Detrending, Stylized Facts and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(3), pages 231-47, July-Sept.
    4. Canova, Fabio, 1993. "Detrending and Business Cycle Facts," CEPR Discussion Papers 782, C.E.P.R. Discussion Papers.
    5. Pagan, Adrian, 1997. "Policy, Theory, and the Cycle," Oxford Review of Economic Policy, Oxford University Press, vol. 13(3), pages 19-33, Autumn.
    6. Hamilton, James D., 1986. "A standard error for the estimated state vector of a state-space model," Journal of Econometrics, Elsevier, vol. 33(3), pages 387-397, December.
    7. Hamilton, James D, 1992. "Was the Deflation during the Great Depression Anticipated? Evidence from the Commodity Futures Market," American Economic Review, American Economic Association, vol. 82(1), pages 157-78, March.
    8. Douglas Staiger & James H. Stock & Mark W. Watson, 1996. "How Precise are Estimates of the Natural Rate of Unemployment?," NBER Working Papers 5477, National Bureau of Economic Research, Inc.
    9. Hamilton, James D, 1985. "Uncovering Financial Market Expectations of Inflation," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1224-41, December.
    10. Clark, Peter K., 1989. "Trend reversion in real output and unemployment," Journal of Econometrics, Elsevier, vol. 40(1), pages 15-32, January.
    11. Adrian Pagan, 1997. "Towards an Understanding of Some Business Cycle Characteristics," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 30(1), pages 1-15.
    12. Kenneth Kuttner, 1992. "Monetary policy with uncertain estimates of potential output," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jan, pages 2-15.
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