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Trend/cycle decomposition of regime-switching processes

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  • Morley, James
  • Piger, Jeremy

Abstract

We present a new approach to trend/cycle decomposition of time series that follow regime-switching processes. The proposed approach, which we label the "regime-dependent steady-state" (RDSS) decomposition, is motivated as the appropriate generalization of the Beveridge and Nelson decomposition [Beveridge, S., Nelson, C.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] to the setting where the reduced-form dynamics of a given series can be captured by a regime-switching forecasting model. For processes in which the underlying trend component follows a random walk with possibly regime-switching drift, the RDSS decomposition is optimal in a minimum mean-squared-error sense and is more broadly applicable than directly employing an Unobserved Components model.

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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: 220-226

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Handle: RePEc:eee:econom:v:146:y:2008:i:2:p:220-226

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

Related research

Keywords: Unobserved components Filtering Nonlinear Markov switching Forecasting;

References

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  1. Nelson, Charles R. & Startz, Richard, 2007. "The zero-information-limit condition and spurious inference in weakly identified models," Journal of Econometrics, Elsevier, vol. 138(1), pages 47-62, May.
  2. Campbell, John & Mankiw, Gregory, 1987. "Are Output Fluctuations Transitory?," Scholarly Articles 3122545, Harvard University Department of Economics.
  3. 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, Elsevier, vol. 7(2), pages 151-174.
  4. Cogley, Timothy, 2001. "Alternative definitions of the business cycle and their implications for business cycle models: A reply to Torben Mark Pederson," Journal of Economic Dynamics and Control, Elsevier, vol. 25(8), pages 1103-1107, August.
  5. Garcia, Rene & Perron, Pierre, 1996. "An Analysis of the Real Interest Rate under Regime Shifts," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 111-25, February.
  6. Potter, Simon M, 1995. "A Nonlinear Approach to US GNP," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(2), pages 109-25, April-Jun.
  7. 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.
  8. 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.
  9. Watson, Mark W., 1986. "Univariate detrending methods with stochastic trends," Journal of Monetary Economics, Elsevier, vol. 18(1), pages 49-75, July.
  10. James C. Morley & Charles R. Nelson & Eric Zivot, 2003. "Why Are the Beveridge-Nelson and Unobserved-Components Decompositions of GDP So Different?," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 235-243, May.
  11. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  12. Morley, James C., 2011. "The Two Interpretations Of The Beveridge–Nelson Decomposition," Macroeconomic Dynamics, Cambridge University Press, vol. 15(03), pages 419-439, June.
  13. Chen, Chao-Chun & Tsay, Wen-Jen, 2006. "The Beveridge-Nelson decomposition of Markov-switching processes," Economics Letters, Elsevier, vol. 91(1), pages 83-89, April.
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Cited by:
  1. Caraiani, Petre, 2012. "Stylized facts of business cycles in a transition economy in time and frequency," Economic Modelling, Elsevier, vol. 29(6), pages 2163-2173.
  2. Kim, Chang-Jin, 2008. "Markov-switching and the Beveridge-Nelson decomposition: Has US output persistence changed since 1984?," Journal of Econometrics, Elsevier, vol. 146(2), pages 227-240, October.

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