DP10272 Following the Trend: Tracking GDP when Long-Run Growth is Uncertain

Using a dynamic factor model that allows for changes in both the long- run growth rate of output and the volatility of business cycles, we document a significant decline in long-run output growth in the United States. Our evidence supports the view that this slowdown started prior to the Great Recession. We show how to use the model to decompose changes in long-run growth into its underlying drivers. At low frequencies, variations in the growth rate of labor productivity appear to be the most important driver of changes in GDP growth for both the US and other advanced economies. When applied to real-time data, the proposed model is capable of detecting shifts in long-run growth in a timely and reliable manner.

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Citation

Petrella, I, T Drechsel and J Antolin-Diaz (2014), ‘DP10272 Following the Trend: Tracking GDP when Long-Run Growth is Uncertain‘, CEPR Discussion Paper No. 10272. CEPR Press, Paris & London. https://cepr.org/publications/dp10272