Let's take a break: Trends and cycles in US real GDP

Pierre Perron, Tatsuma Wada

Research output: Contribution to journalArticle

73 Citations (Scopus)

Abstract

Trend-cycle decompositions for US real GDP such as the unobserved components models, the Beveridge-Nelson decomposition, the Hodrick-Prescott filter and others yield very different cycles which bear little resemblance to the NBER chronology, ascribes much movements to the trend leaving little to the cycle, and some imply a negative correlation between the noise to the cycle and the trend. We argue that these features are artifacts created by the neglect of a change in the slope of the trend function. Once this is accounted for, all methods yield the same cycle with a trend that is non-stochastic except for a few periods around 1973. The cycle is more important in magnitude than previously reported and it accords well with the NBER chronology. Our results are corroborated using an alternative trend-cycle decomposition based on a generalized unobserved components models with errors having a mixture of normals distribution for both the slope of the trend function and the cyclical component.

Original languageEnglish
Pages (from-to)749-765
Number of pages17
JournalJournal of Monetary Economics
Volume56
Issue number6
DOIs
Publication statusPublished - 2009 Sep 1
Externally publishedYes

Keywords

  • Beveridge-Nelson decomposition
  • Non-Gaussian filtering
  • Structural change
  • Trend-cycle decomposition
  • Unobserved components model

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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