Estimating the Common Output Cycle in Australia

I develop a statistical measure of Australia’s common output cycle by combining frequency-domain filtering of industry-level output to isolate its cyclical component with a dynamic factor model featuring stochastic cycle dynamics. The common cycle has an estimated period of around six years and reveals substantial heterogeneity in the timing and strength with which industries participate in the common cycle. Manufacturing and wholesale trade are closely synchronised, while agriculture and mining are mostly driven by their own idiosyncratic cycles. I evaluate the common output cycle’s ability to forecast inflation and find that its predictive performance is statistically indistinguishable from that of an AR(1) benchmark over the forecast horizons considered. I also find evidence of potential endpoint issues when estimating the common output cycle in real time. Overall, these findings suggest that the common output cycle is best viewed as a descriptive measure of the historical features of the Australian output cycle that are shared across industries.