Trends and cycles during the COVID-19 pandemic period

We perform several trend-cycle decompositions through the lens of two unobserved components models, herein estimated for Portugal and the euro area. Our procedure copes with the COVID-19’s consequences by explicitly considering potentially larger second moments during that period. This is achieved through a set of pandemic-specific shocks affecting only the 2020–21 period and embedded into estimation through a piecewise linear Kalman filter. Our methodology generates negligible historical revisions in key smoothed variables when the sample period is expanded until 2021:4, since pandemic shocks absorb a great deal of data volatility with minimal impacts on filtered data revisions or estimated parameters. Furthermore, non-pandemic shock volatility remains largely unaffected by the pandemic period. Innovations affecting the cycle in our preferred model are the key propellers of GDP developments during the COVID-19 pandemic period.