A0654
Title: Improving output gap estimation: A bottom-up approach
Authors: Sina Streicher - ETH Zurich, KOF Swiss Economic Institute (Switzerland) [presenting]
Alexander Rathke - ETH Zurich, KOF Swiss Economic Institute (Switzerland)
Abstract: A multivariate Bayesian state space model is proposed to identify potential output and the output gap consistent with the dynamics of the underlying production sectors of the economy and those of inflation and the labour market. This approach allows decomposing economic fluctuations and long-term trend growth in output and employment into its driving factors. Tracking the cycles of individual sectors allows policy actions to be targeted at specific industries, thereby increasing their efficiency and reducing the chance of pro-cyclical outcomes. Applying the model to the Swiss economy reveals substantial divergence among the considered production sectors. The Swiss economy's business cycle and growth potential are most clearly influenced by the sectors most dependent on the global economy - manufacturing, financial, and other economic services. Compared to established estimation approaches, the enriched information set can help paint a more comprehensive picture of the business cycle.
