Measuring the Euro area output gap using a multivariate unobserved components model containing phase shifts

Chen, X. and Mills, T.C. (2012) Measuring the Euro area output gap using a multivariate unobserved components model containing phase shifts. Empirical Economics, 43(2), pp. 671-692. (doi: 10.1007/s00181-011-0495-7)

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Several recent studies have used multivariate unobserved components models to identify the output gap and the non-accelerating inflation rate of unemployment. A key assumption of these models is that one common cycle component, such as the output gap, drives the cyclical fluctuations in all variables included in the model. This article also uses the multivariate approach to estimate the euro area output gap and the trends and cycles in other macroeconomic variables. However, it adopts a flexible way of linking the output gap to the cycle components in the other variables, in that we do not impose any leading or lagging restrictions between cycle components, as has been done in most previous studies. Our approach also allows us to assess the strength of cycle association and cross-correlation among cycle components using the model’s parameter estimates. Finally, we demonstrate that our multivariate model can provide a satisfactory historical output gap estimate and also a ‘real-time’ estimate for the aggregate euro area.

Item Type:Articles
Glasgow Author(s) Enlighten ID:Chen, Dr Xiaoshan
Authors: Chen, X., and Mills, T.C.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Empirical Economics
Published Online:12 August 2011

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Project CodeAward NoProject NamePrincipal InvestigatorFunder's NameFunder RefLead Dept
516431Permanent Equilibrium Exchange Rates and the Monetary Transmission Mechanism: an Application of the Multivariate Unobserved Components Model to the UK and the Euro AreaRonald MacdonaldEconomic & Social Research Council (ESRC)ES/H006788/1BUS - ECONOMICS