This document is a report from Dun & Bradstreet on the European economy in June 2015. It contains sections that analyze trends in GDP growth and household purchasing power across European countries. It also examines factors like labor productivity, unemployment rates, inflation cycles, and financial market volatility. Statistical techniques like Markov switching models and multivariate GARCH models are used to study relationships between these economic indicators.
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Contents
1. Contribution to growth and real GDP growth forecast
2. A BIG MACronomic approach to the evolution of households’
purchasing power
3. Is sluggish labour productivity to blame?
4. A Hodrick-Prescott approach to the relation between Unemployment
Cycle and Business Cycle
5. Inflation and Inflation forecast: are cycles getting longer?
6. Financial Markets’ jitteriness: A Multivariate-GARCH approach to
volatility
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A Markov Switching Model approach to labour productivity
• Under the Markov Switching (MS) approach, the observed variable is assumed to switch regimes according
to some unobserved variable
• Movements of the state variable between regimes are driven by a Markov process
• Why MS is so popular? Because the probability distribution of the state at any time t depends only on the
state at time t-1, and not on the states at times t-2, t-3, etc…In other words, Markov processes are not path-
dependent
• If a variable follows a Markov process, all that is required to forecast the probability that it will be in a given
regime during the next period is the current period’s probability and a matrix of (time-varying) transition
probabilities, the transition probabilities being the probability for the state variable to move from regime i to
regime j
• Here, the two regimes are ‘fast growth’and ‘slow growth’.
• Running a MS regression, I’ve compute the time-varying probabilities for the economy to move from a fast-
growth mode to a slow-growth mode.
• The interesting (albeit not surprising) finding is that (on average) the probability of moving from fast
to slow growth (hence, a deceleration of the GDP growth rate) is higher when labour productivity is
lower.
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Spain Italy
Greece Ireland
10. 4. A Hodrick-Prescott approach to the
relation between Unemployment Cycle
and Business Cycle