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The Beveridge-Nelson decomposition in retrospect and prospect

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  • Nelson, Charles R.

Abstract

Beveridge and Nelson [Beveridge, Stephen, Nelson, Charles R., 1981. A new approach to 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] proposed that the long-run forecast is a measure of trend for time series such as GDP that do not follow a deterministic path in the long run. They showed that if the series is stationary in first differences, then the estimated trend is a random walk with drift that accounts for growth, and the cycle is stationary. In contrast to linear de-trending, the smoother of Hodrick and Prescott (1981) and Hodrick and Prescott [Hodrick, Robert, Prescott, Edward C., 1997. Post-war US business cycles: An empirical investigation. Journal of Money Credit and Banking 29 (1), 1-16] and the unobserved components model of Harvey, [Harvey, A.C., 1985. Trends and cycles in macroeconomic time series. Journal of Business and Economic Statistics 3, 216-227]. Watson [Watson, Mark W., 1986. Univariate detrending methods with stochastic trends Journal of Monetary Economics 18, 49-75] and Clark [Clark, Peter K., 1987. The cyclical component of US economic activity. The Quarterly Journal of Economics 102 (4), 797-814], the BN decomposition attributes most variation in GDP to trend shocks while the cycles are short and brief. Since each is an estimate of the transitory part of GDP that will die out, it seems natural to compare cycle measures by their ability to forecast future growth. The results presented here suggest that cycle measures contain little if any information beyond the short-term momentum captured by BN.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 146 (2008)
Issue (Month): 2 (October)
Pages: 202-206

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Handle: RePEc:eee:econom:v:146:y:2008:i:2:p:202-206

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Web page: http://www.elsevier.com/locate/jeconom

Related research

Keywords: Beveridge-Nelson decomposition Trend and cycle Forecasting;

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References

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  1. Valerie Cerra & Sweta Chaman Saxena, 2008. "Growth Dynamics: The Myth of Economic Recovery," American Economic Review, American Economic Association, vol. 98(1), pages 439-57, March.
  2. Cogley, Timothy & Nason, James M., 1995. "Effects of the Hodrick-Prescott filter on trend and difference stationary time series Implications for business cycle research," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 253-278.
  3. Elizabeth Wakerly & Byron Scott & James Nason, 2006. "Common trends and common cycles in Canada: who knew so much has been going on?," Canadian Journal of Economics, Canadian Economics Association, vol. 39(1), pages 320-347, February.
  4. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
  5. Watson, Mark W., 1986. "Univariate detrending methods with stochastic trends," Journal of Monetary Economics, Elsevier, vol. 18(1), pages 49-75, July.
  6. Athanasios Orphanides & Simon van Norden, 2003. "The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time," CIRANO Working Papers 2003s-01, CIRANO.
  7. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Christian J. Murray, 2003. "Cyclical Properties of Baxter-King Filtered Time Series," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 472-476, May.
  9. Cogley, Timothy, 2002. "A Simple Adaptive Measure of Core Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 94-113, February.
  10. Nelson, Charles R & Kang, Heejoon, 1979. "Spurious Periodicity in Inappropriately Detrended Time Series," The Warwick Economics Research Paper Series (TWERPS) 161, University of Warwick, Department of Economics.
  11. Chang-Jin Kim & Charles R. Nelson, 1998. "Business Cycle Turning Points, A New Coincident Index, And Tests Of Duration Dependence Based On A Dynamic Factor Model With Regime Switching," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 188-201, May.
  12. Rotemberg, Julio J & Woodford, Michael, 1996. "Real-Business-Cycle Models and the Forecastable Movements in Output, Hours, and Consumption," American Economic Review, American Economic Association, vol. 86(1), pages 71-89, March.
  13. Harvey, A C, 1985. "Trends and Cycles in Macroeconomic Time Series," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(3), pages 216-27, June.
  14. Harvey, A C & Jaeger, A, 1993. "Detrending, Stylized Facts and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(3), pages 231-47, July-Sept.
  15. Clark, Peter K, 1987. "The Cyclical Component of U.S. Economic Activity," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 797-814, November.
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Citations

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Cited by:
  1. Willie Lahari, 2011. "Assessing Business Cycle Synchronisation - Prospects for a Pacific Islands Currency Union," Working Papers 1110, University of Otago, Department of Economics, revised Oct 2011.
  2. Norden, Simon van & Tian, Jing & Jacobs, Jan & Dungey, Mardi, 2012. "On trend-cycle decomposition and data revision," Research Report 12009-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  3. Proietti, Tommaso, 2011. "The Multistep Beveridge-Nelson Decomposition," Working Papers 1 OMEWP, University of Sydney Business School, Discipline of Business Analytics.
  4. João Sousa Andrade & António Portugal Duarte, 2014. "Output-gaps in the PIIGS Economies: An Ingredient of a Greek Tragedy," GEMF Working Papers 2014-06, GEMF - Faculdade de Economia, Universidade de Coimbra.

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