A Trend-Cycle Decomposition with Hysteresis

Business fluctuations can be estimated as the product of perturbations that do not need to be broken down into supply and demand shocks. Joint supply and demand (S&D) shocks can help estimate the cycle in the output gap as well as a cycle in trend output. The model is a univariate trend-cycle decomposition with hysteresis in trend output, that enables the estimation of the output gap and trend output in 81 economies in quarterly frequency, since 1995Q1; and 184 economies in yearly frequency, in several cases since 1950, and in a few cases since 1820. Volatility and dispersion, as well as the frequency of large joint trend-cycle shocks, were low during the Gilded Age period; high during the interwar period, even more so in advanced (AD) economies compared to emerging market and developing economies (EMDE); and low in AD economies and high in EMDE economies in the post WWII period. In contrast with other existing estimates of trend output, those from the trend-cycle decomposition with hysteresis do not evolve smoothly, do not result in an artificial boom before recessions and are less sensitive to new data