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Let's take a break: Trends and cycles in US real GDP

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  • Perron, Pierre
  • Wada, Tatsuma

Abstract

Trend-cycle decompositions for US real GDP such as the unobserved components models, the Beveridge-Nelson decomposition, the Hodrick-Prescott filter and others yield very different cycles which bear little resemblance to the NBER chronology, ascribes much movements to the trend leaving little to the cycle, and some imply a negative correlation between the noise to the cycle and the trend. We argue that these features are artifacts created by the neglect of a change in the slope of the trend function. Once this is accounted for, all methods yield the same cycle with a trend that is non-stochastic except for a few periods around 1973. The cycle is more important in magnitude than previously reported and it accords well with the NBER chronology. Our results are corroborated using an alternative trend-cycle decomposition based on a generalized unobserved components models with errors having a mixture of normals distribution for both the slope of the trend function and the cyclical component.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 56 (2009)
Issue (Month): 6 (September)
Pages: 749-765

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Handle: RePEc:eee:moneco:v:56:y:2009:i:6:p:749-765

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Web page: http://www.elsevier.com/locate/inca/505566

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Keywords: Trend-cycle decomposition Structural change Non-Gaussian filtering Unobserved components model Beveridge-Nelson decomposition;

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