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Trend-Cycle Decomposition of GDP: A Flexible Filter

Author

Listed:
  • Perez, Fernando

    (Banco Central de Reserva del Perú)

Abstract

The measurement of the Trend or long-term GDP is of vital importance for the characterization of macroeconomic scenarios. However, the usual filters are in some cases unstable when adding new data points and quite rigid in terms of their specification, which makes it difficult to calculate. This is especially relevant in contexts of greater uncertainty, where different shocks of varying magnitude can affect the aggregate economy. These filters are quite popular, although they could be unstable in very long series and with potential structural breaks. In this work a so-called 'flexible filter' is proposed, which is of the Cycle-Trend type, but which considers shocks with varying variances over time (Stochastic Volatility). The aforementioned filter is applied to quarterly data from the United States, Canada and Peru. In general, the consideration of a stochastic volatility component is a safe strategy against structural changes. Finally, the methodology also makes it possible to quantify the uncertainty associated with these estimates.

Suggested Citation

  • Perez, Fernando, 2021. "Trend-Cycle Decomposition of GDP: A Flexible Filter," Working Papers 2021-008, Banco Central de Reserva del Perú.
    • Handle: RePEc:rbp:wpaper:2021-008
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    File URL: https://www.bcrp.gob.pe/docs/Publicaciones/Documentos-de-Trabajo/2021/documento-de-trabajo-008-2021.pdf
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    More about this item

    Keywords

    Trend and Cycle Decomposition; State-Space Representation; Stochastic Volatility.;
    All these keywords.

    JEL classification:

    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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