Tracking Growth and the Business Cycle: a Stochastic Common Cycle Model for the Euro Area

António Rua, João Valle e Azevedo and Siem Jan Koopman

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: This paper proposes a new model-based method to obtain a coincident indicator for the business cycle. A dynamic factor model with trend components and a common cycle component is considered which can be estimated using standard maximum likelihood methods. The multivariate unobserved components model includes a stationary higher order cycle. Also higher order trends can be part of the analysis. These generalisations lead to a business cycle that is similar to a band-pass one. Furthermore, cycle shifts for individual time series are incorporated within the model and estimated simultaneously with the remaining parameters. This feature permits the use of leading, coincident and lagging variables to obtain the business cycle coincident indicator without prior analysis of their lead-lag relationship. Besides the business cycle indicator, the model-based approach also allows to get a growth rate indicator. In the empirical analysis for the Euro area, both indicators are obtained based on nine key economic time series including gross domestic product, industrial production, unemployment, confidence indicators and interest rate spread. This analysis contrasts sharply with earlier multivariate approaches. In particular, our more parsimonious approach leads to a growth rate indicator for the Euro area that is similar to the one of EuroCOIN. The latter is based on a more involved approach by any standard and uses hundreds of time series from individual countries belonging to the Euro area.

JEL-codes: C13 C32 (search for similar items in EconPapers)
Date: 2003
References: View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Tracking Growth and the Business Cycle: a Stochastic Common Cycle Model for the Euro Area (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:ptu:wpaper:w200316

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