Journal articles

We set up a semi‐structural unobserved components multi‐country model of the eurozone. The common euro‐area natural rate of interest (NRI) is identified from the joint dynamics of the national data of its 20 member countries and estimated using Bayesian methods. Relative to a univariate approach, the model offers a substantial improvement in the precision of measuring the NRI and in the reliability of its real‐time performance. The results confirm previous findings of a secular decline in the NRI, with our model generating a smoother path. Estimation of different subgroups of eurozone countries indicates convergence of regional NRIs to the euro‐area NRI in the late 2010s and early 2020s.

The German economy is an important economic driver in the Euro area in terms of gross domestic product, labor force, and international integration. We provide a state of the art estimate of the German output gap between 1995 and 2022 and present a nowcasting scheme that accurately predicts the German output gap up to 3 months prior to a gross domestic product data release. To this end, we elicit a mixed‐frequency Bayesian vector‐autoregressive model (MF‐BVAR) using monthly information to form an expectations about the current‐quarter output gap. The mean absolute error of the MF‐BVAR nowcast compared to the final estimate is very small (0.28 percentage points) after only 1 month of observed data. Moreover, we show that business and consumer expectations, international trade, and labor market aggregates consistently explain large shares of variation in the German output gap. Finally, the MF‐BVAR procedure is very reliable, as it implies an output gap that is hardly revised ex post. This is particularly important for policymakers.

We introduce a new leading indicator for the German business cycle based on the content of newspaper articles from the Süddeutsche Zeitung. We use the rapidly evolving technique of Natural Language Processing (NLP) to transform the content of daily newspaper articles between 1992 and 2021 into topic time series using an LDA model. These topic time series reflect broad areas of the German economy since 1992, in particular the recession phases of the High‐Tech Crisis, the Great Financial Crisis and the Covid‐19 pandemic. We use the Newspaper Indicator in a Probit model to demonstrate that our data can be considered as a new leading indicator for predicting recession periods in Germany. Moreover, we show in an out‐of‐sample forecast experiment that our newspaper data have a predictive power for the German business cycle across 12 target variables that is as strong as established survey indicators. Industrial Production, the Stock Market Index DAX, and the Consumer Price Index for Germany can even be predicted out‐of‐sample more accurately with our newspaper data than with survey indices of the Ifo Institute and the OECD.

Instead of assuming a certain factor structure, we statistically test for the factor structure driving common global dynamics in macroeconomic and financial data by employing a stochastic factor selection approach. Using a sample of 16 developed countries from 1996Q1 to 2019Q4, we present strong empirical evidence of a global macro-financial cycle and an independent global financial cycle. Moreover, the global macro-financial cycle we estimate is essentially the global business cycle identified in the literature. It captures the common global macroeconomic dynamics and drives a significant share of the comovement in the financial sector. The remaining commonality in financial variables is driven by separate global financial cycles: the global credit cycle and the global capital flow cycle.

We incorporate macroeconomic uncertainty into a Holston–Laubach–Williams (HLW)-type model of the natural real interest rate (NRI) for the US., where we allow for nonlinearities by employing a regime-switching model. We find macroeconomic uncertainty to strongly depress the NRI in periods mostly but not exclusively associated with US. recessions. These periods are longer lasting in the 1970s and 1980s and rather short-lived after 1990. Outside these periods, and particularly since the 1990s, we find the level of the NRI to be generally higher in comparison to the estimates by HLW.

We propose a way to directly nowcast the output gap using the Beveridge–Nelson decomposition based on a mixed-frequency Bayesian VAR. The mixed-frequency approach produces similar but more timely estimates of the U.S. output gap compared to those based on a quarterly model, the CBO measure of potential, or the HP filter. We find that within-quarter nowcasts for the output gap are more reliable than for output growth, with monthly indicators for a credit risk spread, consumer sentiment, and the unemployment rate providing particularly useful new information about the final estimate of the output gap. An out-of-sample analysis of the COVID-19 crisis anticipates the exceptionally large negative output gap of −8.3% in 2020Q2 before the release of real GDP data for the quarter, with both conditional and scenario nowcasts tracking a dramatic decline in the output gap given the April data.

We consider which labor market variables are the most informative for estimating and nowcasting the US output gap using a multivariate trend-cycle decomposition. Although the unemployment rate clearly contains important cyclical information, it also appears to reflect more persistent movements related to labor force participation that could distort inferences about the output gap. Instead, we show that the alternative U-2 unemployment rate (job losers as a percentage of the labor force) provides a more purely cyclical indicator of labor market conditions. To a lesser extent, but consistent with a link of the output gap to real labor costs in a New Keynesian setting, we also find that average hourly earnings are informative about the output gap.

We jointly estimate the U.S. business and financial cycle through a unified empirical approach which also simultaneously quantifies the role of financial factors. Our approach uses the Beveridge-Nelson decomposition within a medium-scale Bayesian Vector Autoregression. First, we show, both in reduced form and when we identify a structural financial shock, that variation in financial factors had a larger role post-2000 and a more modest role pre-2000. Our results suggest that the financial sector did play a role in overheating the business cycle pre-Great Recession. Second, while an identified financial shock can generate a negative correlation between the lagged credit cycle and the contemporaneous output gap, the unconditional correlation between the credit cycle and the output gap is still positive. The latter at least suggests that one should be careful in associating an increase in the financial cycle to bust in the business cycle.

The literature on international business cycles has employed dynamic factor models (DFMs) to disentangle global from group-specific and national factors in countries’ macroeconomic aggregates. Therefore, the countries have simply been classified ex ante as belonging to the same region or the same level of development. This paper estimates a DFM for a sample of 106 countries and three variables (output, consumption, investment) over the period 1960–2014, in which the countries are classified according to the outcome of a cluster analysis. By comparing the results with those obtained by the previous grouping approaches, we show substantial deviations in the importance of global and group-specific factors. Remarkably, when the groups are defined properly, the “global business cycle” accounts for only a very small fraction of macroeconomic fluctuations, most evidently in the industrialized world. The group-specific factors, on the other hand, play a much greater role for national business cycles than previously thought—also in the pre-globalization period.

The empirical literature on common international business cycles has largely ignored model misspecification in estimated factor models as the various cycles are typically imposed but not tested for. This paper proposes a Bayesian stochastic factor selection approach for multilevel factor models. The procedure is applied to a three-level dynamic factor model with a global factor, six regional factors and three development level factors. We estimate the factor model using real GDP growth data for a panel of 60 countries over the period 1961–2017. We find robust evidence for the presence of a global business cycle, four regional cycles (Europe, North America, Latin America and Asia) and two development level cycles (industrial countries and emerging market economies). This suggests that both geographical proximity and the development level of countries are important dimensions of international business cycle synchronization that should be considered simultaneously, a point not previously made in the existing synchronization literature.

This paper replicates in a wider sense the unobserved components model of Laubach and Williams (Review of Economics and Statistics, 2003, 85, 1063–1070) to estimate the natural rate of interest (NRI) and investigates the role of model uncertainty. A stochastic Bayesian model selection procedure is employed to test the hypothesis of time variation in the NRI against a constant NRI. The model selection confirms time variation in the NRI as a result of changes in potential output growth, but other determinants of the NRI are found constant.

We identify international output and inflation uncertainty and analyze their impact on individual countries' macroeconomic performance. Output and inflation uncertainty on an international level is measured through the conditional variances of common factors in inflation and output growth, estimated from a bivariate dynamic factor model with GARCH errors. The impact of international and country-specific uncertainty is analyzed by including the conditional variances as regressors. We find increases in uncertainty during the first and second oil crisis, the 1980s and 1990s recessions as well as the recent Great Recession to be confined to the international level. The effect of international uncertainty results to be highly significant and unambiguously negative on countries' output growth and inflation rates whereas the impact of country-specific uncertainty is very mixed.

We empirically identify global macroeconomic uncertainty using a dynamic factor model, where the conditional variances of all factors are modeled as stochastic volatility processes. Applying this methodology to OECD data, we find the early 1970s and early 1980s recessions as well as the recent Great Recession of the late 2000s to be associated with increases in uncertainty at the global level, but heightened uncertainty during the early 1990s and 2000s slowdowns to be mostly confined to the national levels. We also find that global uncertainty unambiguously lowers national growth rates and raises national inflation rates, and that key macroeconomic variables like oil, commodity and stock prices as well as global liquidity act as drivers of the global dimension of uncertainty.

This paper proposes an alternative measure for the slack of the aggregate labor market. The natural rate of hours holds valuable information about the state of the labor market that is not reflected by conventional measures, such as the equilibrium rate of unemployment, because it takes the intensive margin into account and is robust to variations in labor force participation. We set up and estimate a multivariate unobserved-components model using information on GDP, inflation, and hours worked, and apply it to the United States and Germany. The estimated hours gap outperforms conventional unemployment gap measures in a Taylor rule by formal model comparison.

We identify global and country‐specific measures of output growth uncertainty for a large OECD country sample by means of a dynamic factor model with stochastic volatility. We find evidence for major bouts of global uncertainty in the early 1970s and late 2000s, and a number of periods with elevated levels of either global or national uncertainty, particularly in the early 1980s, 1990s and 2000s. VAR impulse responses of national macroeconomic variables to our estimated measures of uncertainty reveal that global uncertainty is the major driver of macroeconomic performance in most countries, whereas the impact of national uncertainty is small and frequently insignificant. We also find that uncertainty is transmitted primarily through investment and trade flows rather than through consumption demand.

This paper analyzes the amount of time variation in the parameters of a reduced-form empirical macroeconomic model for the U.S. economy. We decompose output, inflation and unemployment in their stochastic trend and business cycle gap components, with the latter linked through the Phillips curve and Okun’s law. A novel Bayesian model selection procedure is used to test which parameters vary over time and which components exhibit stochastic volatility. Using data from 1959Q2 to 2014Q3 we find substantial time variation in Okun’s law, while the Phillips curve slope appears to be stable. Stochastic volatility is found to be important for cyclical shocks to the economy, while the volatility of permanent shocks remains stable.

This paper estimates equilibrium rates of macroeconomic aggregates for small open economies. We simultaneously identify the transitory and permanent components of output, inflation, the interest rate and the exchange rate by means of a multivariate trend-cycle decomposition. Realizations of the observed macroeconomic aggregates are explained in terms of unobserved equilibrium rates and unobserved transitory components. The transitory components of the variables are linked to each other through an aggregate demand equation, a Phillips curve, and an equation specifying the interest rate-real exchange rate nexus. The model is then applied to Canadian data.

We measure the time-varying degree of world stock market integration of five developed countries (Germany, France, the UK, the US, and Japan) over the period 1970:1–2011:10. Time-varying financial market integration of each country is measured through the conditional variances of the country-specific and common international risk premiums in equity excess returns. The country-specific and common risk premiums and their conditional variances are estimated from a latent factor decomposition through the use of state space methods that allow for GARCH errors. Our empirical results suggest that stock market integration has increased over the period 1970:1–2011:10 in all countries but Japan. And while there is a structural increase in stock market integration in four out of five countries, all countries also exhibit several shorter periods of disintegration (reversals), i.e. periods in which country-specific shocks play a more dominant role. Hence, stock market integration is measured as a dynamic process that is fluctuating in the short run while gradually increasing in the long run.

This paper tests whether increases and decreases in labor taxes have an asymmetric impact on unemployment. Using a panel of 16 OECD countries over the period 1970–2005, we estimate a panel unobserved-component model to account for the fact that unemployment rates and labor taxes are nonstationary but not cointegrated. We find a positive impact of labor tax increases on unemployment in European and Nordic countries, whereas for labor tax decreases, no significant impact is found in these countries. For Anglo-Saxon countries, neither increases nor decreases in labor taxes have any impact on unemployment.

This paper identifies the Canadian-US equilibrium exchange rate based on a simple structural model of the real exchange rate, in which monetary policy follows a Taylor rule interest rate reaction function. The exchange rate is explained by relative output and inflation as observable variables, and by unobserved equilibrium rates as well as unobserved transitory components in output and the exchange rate. Using Canadian data over 1974–2009 we jointly estimate the unobserved components and the structural parameters using the Kalman filter and Bayesian technique. We find that Canada’s equilibrium exchange rate evolves smoothly and follows a trend depreciation. The transitory component is found to be very persistent but much more volatile than the equilibrium rate, resulting in few but prolonged periods of currency misalignments.

This article analyses the dynamic evolution of capital mobility in eight Organization for Economic Co-operation and Development (OECD) countries over the period 1850 to 1992. We estimate an error-correction model of saving and investment that allows to distinguish between short- and long-run capital mobility. The parameters of the error-correction model are allowed to be time-varying and are estimated using the Kalman filter and maximum likelihood technique. We find that both short- and long-run capital mobility was very high at the end of the nineteenth century but since then decreased in most countries. However, the magnitude of changes in long-run capital mobility is very small while the absolute change of short-run capital mobility is substantial.

We introduce a novel approach to estimating output gaps for small open economies. Identification is based on a multivariate trend-cycle decomposition in which transitory exchange rate movements are linked to the output gap and inflation. The model is then applied to Canadian data.

We study the determinants of the level and the evolution of per capita hours worked in a panel of OECD countries since the 1970s. Following Pesaran (2006), our empirical strategy allows for the possibility of cross‐sectionally correlated error terms due to unobserved common factors, which are potentially nonstationary. We find that much of the variation in per capita hours worked across countries and over time can be explained by differences in the level and structure of taxes and government expenditures. Differences in (the evolution of) labor and product market institutions have much less of a role to play. Our results show that a careful treatment of the time‐series properties of the data is crucial.

This paper estimates potential output, the natural rate of unemployment, and the core inflation rate using aggregated euro area data. The empirical model consists of a Phillips curve linking inflation to unemployment. An Okun-type relationship is used to link the output gap to cyclical unemployment. The model further accounts for new developments in unobserved component models by allowing (i) for correlation between shocks to the natural rates and the corresponding gaps and (ii) structural breaks in the drift of potential output and the natural rate of unemployment.

This paper estimates the impact of labour taxes on unemployment using a panel of yearly observations (1970–2005) for 16 OECD countries. Possible heterogeneity of the unemployment incidence of taxes is taken into account by grouping countries according to their wage-setting institutions. Panel data unit root and cointegration tests show that unemployment and labour tax rates are non-stationary but not cointegrated. As this finding may be induced by missing non-stationary variables we set up a panel unobserved component model. Labour taxes are found to have a positive impact on unemployment only in countries characterised by strong but decentralised unions.

Nickell et al. (Econ J 115(500):1–27, 2005) argue that unemployment rates cointegrate with labour market institutions in a panel of OECD countries. This paper replicates their Maddala–Wu panel cointegration test and shows that this test is only valid when (i) the number of countries tends to infinity and (ii) the underlying country-specific cointegration tests are independent. Their finding of cointegration does not survive when small sample properties and heterogeneous cross-sectional dependencies are taken into account.

This paper estimates the United States and euro area NAIRU in a Bayesian framework. We set out a simple structural model explaining unemployment by demand and supply factors, which are treated as unobserved variables that have observable effects on measured unemployment, output and inflation. The model allows for unemployment persistence and a time‐varying core inflation rate. The results show that although cyclical shocks are very persistent, most of the increase in European unemployment is driven by structural factors. The degree of persistence is lower in the United States but demand shocks seem to be more important in explaining variation in unemployment.