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Global and Local Components of Output Gaps

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Abstract

This paper proposes a multi-level dynamic factor model to identify common components in output gap estimates. We pool multiple output gap estimates for 157 countries and decompose them into one global, eight regional, and 157 country-specific cycles.Our approach easily deals with mixed frequencies, ragged edges, and discontinuities in the underlying output gap estimates. To restrict the parameter space in the Bayesian state space model, we apply a stochastic search variable selection approach and base the prior inclusion probabilities on spatial information. Our results suggest that the global and the regional cycles explain a substantial proportion of the output gaps. On average, 18% of a country’s output gap is attributable to the global cycle, 24% to the regional cycle, and 58% to the local cycle.

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  • Florian Eckert & Nina Mühlebach, 2021. "Global and Local Components of Output Gaps," KOF Working papers 21-497, KOF Swiss Economic Institute, ETH Zurich.
    • Handle: RePEc:kof:wpskof:21-497
    DOI: 10.3929/ethz-b-000514977
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    More about this item

    Keywords

    Multi-Level DFM; Bayesian State Space Model; Output Gap Decomposition; Model Combination; Business Cycles; Variable Selection; Spatial Prior;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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