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Aggregate Output Measurements: A Common Trend Approach

Martín Almuzara (Federal Reserve Bank of New York, New York, United States)

Gabriele Fiorentini (Universitá di Firenze and RCEA, Florence, Italy)

Enrique Sentana (CEMFI and CEPR, Madrid, Spain)

Essays in Honor of Joon Y. Park: Econometric Methodology in Empirical Applications

ISBN: 978-1-83753-213-1, eISBN: 978-1-83753-212-4

Publication date: 24 April 2023

Abstract

The authors analyze a model for N different measurements of a persistent latent time series when measurement errors are mean-reverting, which implies a common trend among measurements. The authors study the consequences of overdifferencing, finding potentially large biases in maximum likelihood estimators (MLE) of the dynamics parameters and reductions in the precision of smoothed estimates of the latent variable, especially for multiperiod objects such as quinquennial growth rates. The authors also develop an R² measure of common trend observability that determines the severity of misspecification. Finally, the authors apply their framework to US quarterly data on GDE and GDI, obtaining an improved aggregate output measure.

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Acknowledgements

Acknowledgments

We are grateful to Dante Amengual, Boraǧan Aruoba, Peter Boswijk, Frank Diebold, Ulrich Müller, Tommaso Proietti, Richard Smith, and Mark Watson for useful discussions, as well as audiences at Princeton, ESCoE (London 2018), ESEM (Köln 2018), Computational and Financial Econometrics (Pisa 2018) and SAEe (Madrid 2018). Yoosoon Chang and two anonymous referees have also provided very useful feedback. Of course, the usual caveat applies. The first author acknowledges financial support from the Santander Research chair at CEMFI, the second one is grateful to MIUR through the PRIN project “High-dimensional time series for structural macroeconomic analysis in times of pandemic”, while the third one received funding from the Spanish Ministry of Science and Innovation through grant PID2021-128963NB-I00. The views expressed in this chapter are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.

Citation

Almuzara, M., Fiorentini, G. and Sentana, E. (2023), "Aggregate Output Measurements: A Common Trend Approach", Chang, Y., Lee, S. and Miller, J.I. (Ed.) Essays in Honor of Joon Y. Park: Econometric Methodology in Empirical Applications (Advances in Econometrics, Vol. 45B), Emerald Publishing Limited, Leeds, pp. 3-33. https://doi.org/10.1108/S0731-90532023000045B001

Publisher

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Emerald Publishing Limited