A nonlinear look at trend MFP growth and the business cycle: results from a hybrid Kalman/Markov switching model
Federal Reserve Board, Divisions of Research & Statistics and Monetary Affairs, 2005 - Business & Economics - 17 pages
"The cycle in output and hours worked is not symmetric: it behaves differently around recessions than in expansions. Similarly, the trend in multifactor productivity (MFP) seems to pass through different regimes; there was an extended period of slow MFP growth from about 1973 through 1995, and faster growth thereafter. Typical linear models and linear filters such as the Kalman filter deal poorly with asymmetry and regime changes. This paper attempts to determine more accurately and quickly any shifts in trend MFP growth, using a nonlinear Kalman/Markov filter with a model of the unobserved components of output and hours. This hybrid model incorporates regime-switching in the business cycle and in the trend growth of MFP. Estimation results are promising. The hybrid model and associated filter appear to be faster than the basic Kalman filter in detecting turning points in the smoothed conditional mean estimate of trend MFP growth; in addition, the hybrid model avoids some of the Kalman filter's biases in reconstructing historical business cycles and the MFP trend"--Abstract.
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Adam Copeland Ana Aizcorbe Andreas Lehnert Andrew Cohen April asymmetry Athanasios Orphanides August Banking Industry Berger Brian Sack business cycle business-cycle capital services capital stock Chris Downing Chris Murray coefﬁcient conditional mean estimate Covitz cycle t-1 cyclical December Diana Hancock Driscoll Economics Discussion Series estimate of trend Evidence ex post smoothed exogenous February Federal Reserve Board Figure Finance and Economics ﬁom Fisher index hours cycle hybrid model Inﬂation Interest Rates January July Kalman ﬁlter Kevin Moore lagged dependent variable linear Kalman model linear model Market Markov MFP trend Michael Monetary Policy multifactor productivity multivariate November observation equations October output and hours output cycle equation paper Parameter Standard error percent Quality-adjusted rate of MFP recessionary regime-switching Robert September 2002 shocks to trend Solow residual speciﬁcation state-space Steven Takeshi Kimura trend growth rate trend hours trend in MFP trend in multifactor trend MFP growth Wayne Passmore William