Business cycle dynamics in a small open economy

Abstract

This article combines common factor extraction techniques with permanent and temporary regime switching to analyse Chile's business cycle fluctuations. We find asymmetries across business cycle episodes as well as within the cycle.

Notes

¹ The asymmetric aspect of the business cycle is also tested by Peiro (2004) for the industrial production index of seven European countries and by Olekalns (2001) for a number of macroeconomic variables for Australia.

² Apel and Jansson (1997) specify a model that jointly estimates potential output and the nonaccelerating inflation rate of unemployment (NAIRU) using the Phillips (1958) curve relationship and Okun's Law.

³ The assumption of unitary variance is made for identification, but the assumption is not particularly restrictive, as the variances of the permanent and temporary components of output, investment and consumption depend on the magnitude of the factor loadings.

⁴ The filtered probabilities use data only up to each observation, whereas smoothed probabilities use information from the entire sample.

Fig. 2. Estimated probabilities of low-growth states permanent component