Let's take a break: Trends and cycles in US real GDP |
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Authors: | Pierre Perron Tatsuma Wada |
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Institution: | a Department of Economics, Boston University, Boston, MA 02215, USA b Department of Economics, Wayne State University, Detroit, MI 48202, USA |
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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. |
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Keywords: | Trend-cycle decomposition Structural change Non-Gaussian filtering Unobserved components model Beveridge-Nelson decomposition |
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