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 language | English |
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Pages (from-to) | 749-765 |
Number of pages | 17 |
Journal | Journal of Monetary Economics |
Volume | 56 |
Issue number | 6 |
DOIs | |
Publication status | Published - 2009 Sep |
Externally published | Yes |
Keywords
- Beveridge-Nelson decomposition
- Non-Gaussian filtering
- Structural change
- Trend-cycle decomposition
- Unobserved components model
ASJC Scopus subject areas
- Finance
- Economics and Econometrics