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Extracting Growth Cycles from Productivity Indexes

Introduction

This paper coincides with the Statistics New Zealand Hot Off The Press release, Productivity Statistics 1978–2006. The release adds to the existing understanding of New Zealand’s productivity performance in the measured sector1 by including backdated figures from 1978 to 1987 in addition to the previously released series. The longer time series means it is now more feasible to identify growth cycles in the data.

The analysis of growth cycles has been undertaken to assist users in interpreting the results of the Statistics NZ productivity series, as well as to provide additional insight into the nature of the New Zealand economy over the last three decades. In this context, the benefit of breaking the data into cycles is that this approach better accounts for factors that tend to vary within a cycle, such as capacity utilisation, so that comparisons of productivity performance between periods can be undertaken with the impact of these additional factors minimised.

There are a number of data filters commonly used in practice that aid in identifying business cycles in economic time series. Such filters can also be used to extract growth cycles from productivity data. The application of the filters can differ from the business cycle literature, however, because it is not necessary to assume that business cycles and productivity growth cycles are of the same length.

The filters used in this paper are: the Henderson filter, Hodrick-Prescott filter and Baxter-King filter. The performance of each is compared with known stylised features of the productivity data. Growth cycles, using each of these methods, are calculated for the labour, capital, and multifactor productivity series, as well as the output series. Additionally, supplementary cycles for the labour and capital input series are presented in appendix C.

Due to the specific objective of this exercise, this paper is not intended to provide a comprehensive evaluation of New Zealand’s growth cycles, and it should be noted that the models discussed are univariate in nature. Thus, the economic conditions throughout the time period are also considered to provide a more complete analysis. To this end, this paper evaluates the estimated cycles in light of the key economic events throughout the series. A timeline of notable economic events and reforms, as well as supplementary graphs of economic indicators, are presented in appendices A and B. Additionally, when interpreting the results in a wider context, readers should note that the productivity series covers the measured sector, as opposed to the whole economy.

This paper is structured as follows: section 2 provides a brief summary of previous analysis undertaken on New Zealand business cycles. The paper then provides background into the concepts of productivity and the linear filters considered in sections 3 and 4, respectively. Section 5 discusses the results of applying the filters to the multifactor, labour and capital productivity series and output.

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