The trend–cycle decomposition of output and the Phillips curve: Bayesian estimates for Italy and the Euro area

Fabio Busetti and Michele Caivano

Empirical Economics, 2016, vol. 50, issue 4, No 18, 1565-1587

Abstract: Abstract A standard model-based trend–cycle decomposition of Italian GDP yields a likelihood function that is relatively flat. Bayesian estimation of the model allows to impose a mildly informative prior on the parameter governing the periodicity of the cycle, and thus, it helps to achieve the preferred decomposition. In a bivariate output and Phillips curve model for Italy, it is found that (i) the median response of prices to a 1 % shock to the output gap is equal to about 0.5 % after 20 quarters, (ii) the inflation cycle lags GDP on average by about three quarters. Estimating the model with Euro area data provides evidence of a smaller impact of the output gap on prices (0.4 %) and a lower lag of the inflation cycle with respect to GDP.

Keywords: Bayesian methods; Unobserved components; Potential output; Trend; Cycle (search for similar items in EconPapers)
JEL-codes: C30 C50 E50 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (7)

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DOI: 10.1007/s00181-015-0982-3

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