Robustness of the trend-cycle decomposition of total factor productivity in EUCAM

The EU’s Commonly Agreed Methodology (EUCAM) is used by the European Commission to estimate potential output and the output gap in order to appraise the productive capacity and the cyclical position of the EU economies. This paper assesses the robustness of the decomposition between trend and cyclical total factor productivity, two quantities involved in EUCAM which are notoriously difficult to disentangle in real-time. In 2010 EUCAM was extended to incorporate additional information about capacity utilisation in this detrending. The robustness of the trend-cycle decomposition of total factor productivity is assessed with respect to variations in the prior distribution of model parameters, in the set of indicators used to proxy capacity utilisation, and in the assumption of cyclical symmetry. The analysis shows that EUCAM is reasonably robust to the departures in model assumptions examined.