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Trends and cycles under changing economic conditions

Cláudia Duarte (), José Maria () and Sharmin Sazedj

Economic Modelling, 2020, vol. 92, issue C, 126-146

Abstract: The identification of trends and cycles is often a challenging task under sizeable changes in economic conditions. Business cycles have unique features, varying in duration, intensity and across countries. We propose an unobserved components model with flexible product and labour market equations to cope with evolving economic conditions, namely time-varying inflation processes and labour share trends. Moreover, we augment the information set with data-driven low-frequency movements in real variables before initiating a joint estimation of all unobserved components. We use the same model to establish an international comparison between the euro area and Portugal covering 40 years of data. We conclude that Portugal witnessed (i) a steeper potential output deceleration since the 1990s, driven initially by productivity and afterwards also by the labour and capital inputs; (ii) a pervasively higher volatility in labour and product markets; and (iii) a long-lived interruption in convergence trends after the 2000s.

Keywords: Potential output; Simultaneous equation models; Trends and cycles; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: C11 C30 E32 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.econmod.2020.06.011

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