Estimating Permanent and Transitory Components of GNP Using Consumption Information

This paper estimates permanent and transitory components of GNP using an unobserved components model that incorporates consumption information. Agents that discriminate between permanent and transitory as well as anticipated and unanticipated changes in GNP signal the persistence of a change in GNP by the size of their consumption response. Consumption data have previously been employed to discern permanent and transitory properties of GNP using a vector autoregressive (VAR) model. The unobserved components approach used in this paper has several advantages over the VAR approach and provides new evidence concerning the two components.