Hostname: page-component-586b7cd67f-dlnhk Total loading time: 0 Render date: 2024-11-22T20:59:59.447Z Has data issue: false hasContentIssue false
  • English
  • Français

THE TWO INTERPRETATIONS OF THE BEVERIDGE–NELSON DECOMPOSITION

Published online by Cambridge University Press:  10 June 2010

James C. Morley
James C. Morley*
Affiliation:
Washington University in St. Louis
*
Address correspondence to: James C. Morley, Department of Economics, Box 1208, Washington University in St. Louis, One Brookings Drive, St. Louis, MO 63130-4899, USA; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

The Beveridge–Nelson decomposition calculates trend and cycle for an integrated time series. However, there are two ways to interpret the results from the decomposition. One interpretation is that the optimal long-run forecast (minus any deterministic drift) used to calculate the Beveridge–Nelson trend corresponds to an estimate of an unobserved permanent component. The other interpretation is that the optimal long-run forecast defines an observable permanent component. This paper examines some issues surrounding these two interpretations and provides empirical support for interpreting the Beveridge–Nelson trend as an estimate when considering macroeconomic data.

Keywords

Beveridge–Nelson DecompositionTrend/cycle DecompositionState-Space ModelsUnobserved-Components Models
Type
Articles
Information
Macroeconomic Dynamics , Volume 15 , Issue 3 , June 2011 , pp. 419 - 439
Copyright
Copyright © Cambridge University Press 2010

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Anderson, Heather M., Low, Chin Nam, and Snyder, Ralph D. (2006) Single source of error state space approach to the Beveridge Nelson decomposition. Economics Letters 91, 104–109.Google Scholar
Andrews, Donald W.K. (1993) Tests for parameter instability and structural change with unknown change point. Econometrica 61, 821–856.Google Scholar
Andrews, Donald W.K. and Ploberger, Werner (1994) Optimal tests when a nuisance parameter is present only under the alternative. Econometrica 62, 1383–1414.Google Scholar
Beveridge, Stephen and Nelson, Charles R. (1981) A new approach to the decomposition of economic time series into permanent and transitory components with particular attention to measurement of the business cycle. Journal of Monetary Economics 7, 151–174.Google Scholar
Blanchard, Olivier and Quah, Danny (1989) The dynamic effects of aggregate demand and supply disturbances. American Economic Review 79, 655–673.Google Scholar
Clarida, Richard H. and Taylor, Mark P. (2003) Nonlinear permanent–temporary decompositions in macroeconomics and finance. Economic Journal 113, C125–C139.Google Scholar
Harvey, Andrew C. (1989) Forecasting, Structural Time Series Models and the Kalman Filter. Cambridge, UK: Cambridge University Press.Google Scholar
Harvey, Andrew C. and Koopman, Siem J. (2000) Signal extraction and the formulation of unobserved components models. Econometrics Journal 3, 84–107.Google Scholar
Hausman, Jerry (1978) Specification tests in econometrics. Econometrica 46, 1251–1271.CrossRefGoogle Scholar
Maravall, Andrew (1995) Unobserved components in economic time series. In Pesaran, Hashem and Wickens, Michael R. (eds.), Handbook of Applied Econometrics, Vol. 1: Macroeconomics, pp. 12–72. Oxford, UK: Blackwell.Google Scholar
Morley, James C. (2002) A state-space approach to calculating the Beveridge–Nelson decomposition. Economics Letters 75, 123–127.Google Scholar
Morley, James C., Nelson, Charles R., and Zivot, Eric (2003) Why are the Beveridge–Nelson and unobserved-components decompositions of GDP so different? Review of Economics and Statistics 85, 235–243.Google Scholar
Oh, Kum Hwa, Zivot, Eric, and Creal, Drew (2008) The relationship between the Beveridge–Nelson decomposition and other permanent–transitory decompositions that are popular in economics. Journal of Econometrics 146, 207–219.CrossRefGoogle Scholar
Proietti, Tommaso (1995) The Beveridge–Nelson decomposition: Properties and extensions. Journal of the Italian Statistical Society 4, 101–124.Google Scholar
Proietti, Tommaso (2006) Trend–cycle decompositions with correlated components. Econometric Reviews 25, 61–84.Google Scholar
Proietti, Tommaso and Harvey, Andrew C. (2000) A Beveridge–Nelson smoother. Economics Letters 67, 139–146.Google Scholar
Quah, Danny (1992) The relative importance of permanent and transitory components: Identification and some theoretical bounds. Econometrica 60, 107–118.CrossRefGoogle Scholar
Watson, Mark W. (1986) Univariate detrending methods with stochastic trends. Journal of Monetary Economics 18, 49–75.Google Scholar