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TREND IN CYCLE OR CYCLE IN TREND? NEW STRUCTURAL IDENTIFICATIONS FOR UNOBSERVED-COMPONENTS MODELS OF U.S. REAL GDP

Published online by Cambridge University Press:  13 June 2014

Mardi Dungey
Affiliation:
University of Tasmania, CFAP, University of Cambridge and CAMA
Jan P.A.M. Jacobs
Affiliation:
University of Groningen, University of Tasmania CAMA and CIRANO
Jing Tian
Affiliation:
University of Tasmania
Simon van Norden*
Affiliation:
HEC Montréal, CAMA, CIRANO and CIREQ
*
Address correpondence to: Simon van Norden, HEC Montréal, 3000 Chemin de la Cote Sainte Catherine, Montreal, QC H3T 2A7, Canada; e-mail: simon.van-norden@hec.ca.

Abstract

A well-documented property of the Beveridge–Nelson trend–cycle decomposition is the perfect negative correlation between trend and cycle innovations. We show how this may be consistent with a structural model where permanent innovations enter the cycle or transitory innovations enter the trend, and that identification restrictions are necessary to make this structural distinction. A reduced-form unrestricted version is compatible with either option, but cannot distinguish which is relevant. We discuss economic interpretations and implications using U.S. real GDP data.

Type
Articles
Copyright
Copyright © Cambridge University Press 2014 

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