Dun & Bradstreet’s Regional View Europe

June 2015

2

Contents1. 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

Follow us on Twitter @DnBEconomy | #DnBEconBrief

1. Contribution to growth and real GDP growth forecast

4Follow us on Twitter @DnBEconomy | #DnBEconBrief

2. A BIG MACronomic approach to the evolution of households’

purchasing power

6Follow us on Twitter @DnBEconomy | #DnBEconBrief

3. Is sluggish labour productivity to blame?

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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

4. A Hodrick-Prescott approach to the relation between

Unemployment Cycle and Business Cycle

11Follow us on Twitter @DnBEconomy | #DnBEconBrief

12Follow us on Twitter @DnBEconomy | #DnBEconBrief

5. Inflation and Inflation forecastsAre cycles getting longer?

14Follow us on Twitter @DnBEconomy | #DnBEconBrief

15Follow us on Twitter @DnBEconomy | #DnBEconBrief

6. Financial Markets’ jitterinessA Multivariate-GARCH approach to volatility

17Follow us on Twitter @DnBEconomy | #DnBEconBrief

18Follow us on Twitter @DnBEconomy | #DnBEconBrief

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