Monthly US Business Cycle Indicators: A New Multivariate Approach Based on a Band-Pass Filter

Publication Type

Working paper

Authors

Marczak, Martyna and Gómez, Víctor

Year of publication

2013

Published in

FZID Discussion Papers

Editor

FZID

Band/Volume

64/

This article proposes a new multivariate method to construct business cycle indicators.
The method is based on a decomposition into trend–cycle and irregular. To derive the
cycle, a multivariate band–pass filter is applied to the estimated trend–cycle. The whole
procedure is fully model–based. Using a set of monthly and quarterly US time series, two
monthly business cycle indicators are obtained for the US. They are represented by the
smoothed cycles of real GDP and the industrial production index. Both indicators are
able to reproduce previous recessions very well. Series contributing to the construction
of both indicators are allowed to be leading, lagging or coincident relative to the business
cycle. Their behavior is assessed by means of the phase angle and the mean phase angle
after cycle estimation. The proposed multivariate method can serve as an attractive tool
for policy making, in particular due to its good forecasting performance and quite simple
setting. The model ensures reliable realtime forecasts even though it does not involve
elaborate mechanisms that account for, e.g., changes in volatility.