Are inflation expectations rising from the ashes?

Inflation (Finance) ; Rational expectations (Economic theory)

Getting “real” about monetary policy

Monetary policy ; Federal funds rate

Is the business cycle still an inventory cycle?

Business cycles

Is all that talk just noise?

Monetary policy

A comparison of the real-time performance of business cycle dating methods

This paper evaluates the ability of formal rules to establish U.S. business cycle turning point dates in real time. We consider two approaches, a nonparametric algorithm and a parametric Markov-switching dynamic-factor model. In order to accurately assess the real-time performance of these rules, we construct a new unrevised "real-time" data set of employment, industrial production, manufacturing and trade sales, and personal income. We then apply the rules to this data set to simulate the accuracy and timeliness with which they would have identified the NBER business cycle chronology had they been used in real time for the past 30 years. Both approaches accurately identified the NBER dated turning points in the sample in real time, with no instances of false positives. Further, both approaches, and especially the Markov-switching model, yielded significant improvement over the NBER in the speed with which business cycle troughs were identified. In addition to suggesting that business cycle dating rules are an informative tool to use alongside the traditional NBER analysis, these results provide formal evidence regarding the speed with which macroeconomic data reveals information about new business cycle phases.Business cycles

A steady-state approach to trend/cycle decomposition of regime-switching processes

In this paper, we present a new approach to trend/cycle decomposition under the assumption that the trend is the permanent component and the cycle is the transitory component of an integrated time series. The permanent component is defined as the steady-state level of the series, a definition that has exploitable forecasting implications useful for identification. We operationalize the steady-state approach for regime-switching processes and we use generated data from such processes to demonstrate the advantages of the steady-state approach over alternative approaches to trend/cycle decomposition. We then apply the steady-state approach to estimate the trend and cycle of U.S. real GDP implied by a regime-switching forecasting model. Our findings portray a very different picture of the business cycle than implied by more traditional methods.Time-series analysis ; Business cycles

Identifying business cycle turning points in real time

This paper evaluates the ability of a statistical regime-switching model to identify turning points in U.S. economic activity in real time. The authors work with a Markov-switching model fit to real gross domestic product and employment data that, when estimated on the entire postwar sample, provides a chronology of business cycle peak and trough dates close to that produced by the National Bureau of Economic Research (NBER). Next, they investigate how accurately and quickly the model would have identified NBER-dated turning points had it been used in real time for the past 40 years. In general, the model identifies turning point dates in real time that are close to the NBER dates. For both business cycle peaks and troughs, the model provides systematic improvement over the NBER in the speed at which turning points are identified. Importantly, the model achieves this with few instances of “false positives.” Overall, the evidence suggests that the regime-switching model could be a useful supplement to the NBER Business Cycle Dating Committee for establishing turning point dates. It appears to capture the features of the NBER chronology accurately and swiftly; furthermore, the method is transparent and consistent.Forecasting ; Economic conditions ; Business cycles

International perspectives on the "Great Moderation"

Macroeconomics

Is inflation persistence intrinsic in industrial economies?

We apply both classical and Bayesian econometric methods to characterize the dynamic behavior of inflation for twelve industrial countries over the period 1984-2003, using four different price indices for each country. In particular, we estimate a univariate autoregressive (AR) model for each series, and consider the possibility of a structural break at an unknown date. For many of these countries, we find strong evidence for a break in the intercept of the AR equation in the late 1980s or early 1990s. Allowing for a break in intercept, the inflation measures generally exhibit relatively low inflation persistence. Evidently, high inflation persistence is not an inherent characteristic of industrial economies.Inflation (Finance)

Common stochastic trends, common cycles, and asymmetry in economic fluctuations

This paper investigates the nature of U.S. business cycle asymmetry using a dynamic factor model of output, investment, and consumption. We identify a common stochastic trend and common transitory component by embedding the permanent income hypothesis within a simple growth model. Markov-switching in each component captures two types of asymmetry: Shifts in the growth rate of the common stochastic trend, having permanent effects, and "plucking" deviations from the common stochastic trend, having only transitory effects. Statistical tests suggest both asymmetries were present in post-war recessions, although the shifts in trend are less severe than found in the received literature.Business cycles ; Recessions