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Consumers, consumer prices and the Czech business cycle identification
Indentifying the Czech business cycle using simulated inflation responses.
Authors:
J. Podpiera
Publisher:
Czech National Bank, Czech Republic, 2004
How can the business cycle be derived?
The paper proposes an alternative method for deriving the business cycle using simulated inflation responses. It interprets the inflation responses to an increase in nominal expenditures that are based on an estimated partial equilibrium model. An above-average inflationary response indicates a boom phase and a below-average response shows an economic slowdown.
The new method proposed is likely to be more accurate in identifying the business cycle than the alternative methods. This is due to the elimination of the two major drawbacks of the methods commonly used filtering GDP series. Unlike the filter-based methods, it is not affected by end-point bias. In addition, because it uses data on prices and budget shares, which are not subject to revisions, it does not defocus the relationship between real-time data and price dynamics like the standard methods do.
The proposed method is applied to Czech data during 1994–2003. In order to discriminate between the available range of Czech business cycle measures, the proposed measure of the business cycle (IBC) is compared with the available estimates for the Czech Republic, namely, the production function based measure as used by the Czech Ministry of Finance (CMF) and the Economic Intelligence Unit (EIU), and the output gap using Kalman filter estimation as performed by the Czech National Bank (CNB).
Major findings are:
- the most closely correlated measure of the business cycle with the new estimate is that of the EIU - the correlation coefficient equals 0.98
- the EIU business cycle performs better in detecting the inflation environment as compared to the other methods
- the CMF indicator exhibits a much lower correlation with the proposed indicator (0.78) as compared to the EIU measure
- a lower correlation is found between the IBC indicator and the CNB’s Kalman filter estimate (0.75)
The importance of the findings for policy decisions is in the discrimination between the available estimates of the business cycle indicators. This importance is heightened in situations where the same methodology applied to similar or identical datasets delivers a different picture of the stance in the business cycle. This reveals the high importance of econometric expertise and underlines the uncertainty of such a measure. The new method can provide an insight into the business cycle which could prove helpful in assessing the inflation environment.
Summary originally provided by GDNet, an Eldis content partner
