Trends and Cycles in Labour Productivity in the Major OECD Countries

This paper uses a multivariate generalization of the Beveridge and Nelson methodology to model trends and cycles of business sector labour productivity in the major OECD countries. The method implies that the trend is the long-run forecast of productivity, given all available information; the cycle is thus interpreted as the total excess growth that would be forecasted beyond `normal' rates of productivity (see Evans and Reichlin (1993a)). Multivariate trends in productivity were estimated including series that Granger-cause and possibly are cointegrated with productivity. The corresponding cycles were compared with those generated by the Hodrick-Prescott filter and with the business cycle data of the OECD. The stability and predictive properties of the Beveridge-Nelson and Hodrick-Prescott trends were compared. Finally, the estimated productivity gaps were used as proxies for capacity utilization in economic models of price formation in order to assess their empirical validity. The sample period considered is 1960-92 and data are quarterly.