A multivariate unobserved components model of cyclical activity

1 2 This paper presents results from the estimation of a multivariate unobserved components model of cyclical activity. The model is motivated by a desire to let the data speak as much as possible, and hence to avoid imposing ad hoc and unjustifiable assumptions about trends and cycles. Estimated over the period 1970:1 to 1999:3 via the Kalman filter and maximum likelihood, the model identifies a common, trendreverting component to real output, unemployment and capacity utilisation. The structure of the model allows an interesting factor interpretation to be put on the estimate of the output gap. These estimates are consistent with priors, but there is no consistent match to any one simple smoother such as the HP filter. 1 I wish to thank participants at the New Zealand Econometric Study Group Meeting in Hamilton, 12-13 February 1999, and in particular my discussant, John Haywood, for comments on an earlier version of this paper. I also wish to thank John McDermott and other colleagues in the Economics Department of the Reserve Bank of New Zealand for helpful discussions. 2 This paper is not to be quoted without the author’s permission. The information contained here should be treated as preliminary. The views expressed in this paper are those of the author and they may not represent the views of the Reserve Bank of New Zealand. © Reserve Bank of New Zealand