Estimating the Permanent and Transitory Components of the UK Business Cycle

T C Mills and P Wang

Economic Issues Journal Articles, 2003, vol. 8, issue 1, 1-14

Abstract: We estimate a model that incorporates two key features of business cycles, comovement among economic variables and switching between regimes of boom and slump, to quarterly UK data for the last four decades. Common permanent and transitory factors, interpreted as composite indicators of coincident variables, and estimates of turning points from one regime to the other, are extracted from the data by using the Kalman filter and maximum likelihood estimation. Both comovement and regime switching are found to be important features of the UK business cycle. The components produce sensible representations of the cycles and the estimated turning points agree fairly well with independently determined chronologies.

Date: 2003
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