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Trends and cycles during the COVID-19 pandemic period

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  • José R. Maria
  • Paulo Júlio

Abstract

We devise a simple yet versatile strategy to perform trend-cycle decompositions in severe crisis periods, such as the COVID-19 pandemic period. The proposed strategy propels a great deal of volatility during this period into pandemic-specific shocks, with minimal impacts on non-pandemic disturbances. We start by estimating two unobserved components models until 2019:4, for Portugal and the euro area. We then introduce several pandemicspecific disturbances and estimate their variances during the 2020-21 period, keeping fixed all remaining model parameters. Finally, we bring together the information from both estimation stages through a piecewise linear Kalman filter, assuming such heteroskedastic environment. Our strategy has the attractiveness of generating negligible historical revisions when the 2020-2021 period is added to the estimation sample, despite the large pandemic disruption. Results suggest that innovations affecting the cycle are key drivers of GDP during the pandemic period, while yielding negligible historical revisions.

Suggested Citation

  • José R. Maria & Paulo Júlio, 2023. "Trends and cycles during the COVID-19 pandemic period," Working Papers w202311, Banco de Portugal, Economics and Research Department.
    • Handle: RePEc:ptu:wpaper:w202311
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    References listed on IDEAS

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    1. Marko Melolinna & Máté Tóth, 2019. "Output gaps, inflation and financial cycles in the UK," Empirical Economics, Springer, vol. 56(3), pages 1039-1070, March.
    2. Duarte, Cláudia & Maria, José R. & Sazedj, Sharmin, 2020. "Trends and cycles under changing economic conditions," Economic Modelling, Elsevier, vol. 92(C), pages 126-146.
    3. 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.
    4. Bodnár, Katalin & Le Roux, Julien & Lopez-Garcia, Paloma & Szörfi, Béla, 2020. "The impact of COVID-19 on potential output in the euro area," Economic Bulletin Articles, European Central Bank, vol. 7.
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