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Deterministic and stochastic trends in the time series models: a guide for the applied economist

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  • B. Bhaskara Rao

Abstract

Applied economists working with time series data face a dilemma in selecting between models with deterministic and stochastic trends. While models with deterministic trends are widely used, models with stochastic trends are not so well known. In an influential paper Harvey (1997) strongly advocates a structural time series approach with stochastic trends in place of the widely used autoregressive models based on unit root tests and cointegration techniques. Therefore, it is important to understand their relative merits. This article suggests that both methodologies are useful and they may perform differently in different models. This article provides a few guidelines to the applied economists to understand these alternative methods.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/00036840701765494
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 42 (2010)
Issue (Month): 17 ()
Pages: 2193-2202

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Handle: RePEc:taf:applec:v:42:y:2010:i:17:p:2193-2202

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  1. John Dimitropoulos & Lester C. Hunt & Guy Judge, 2004. "Estimating Underlying Energy Demand Trends using UK Annual Data," Surrey Energy Economics Centre (SEEC), School of Economics Discussion Papers (SEEDS) 108, Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey.
  2. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
  3. Tatsuma Wada & Pierre Perron, 2005. "Trend and Cycles: A New Approach and Explanations of Some Old Puzzles," Computing in Economics and Finance 2005 252, Society for Computational Economics.
  4. Allan w. Gregory & Bruce E. Hansen, 1992. "residual-Based Tests for Cointegration in Models with Regime Shifts," Working Papers 862, Queen's University, Department of Economics.
  5. Perron, Pierre & Qu, Zhongjun, 2006. "Estimating restricted structural change models," Journal of Econometrics, Elsevier, vol. 134(2), pages 373-399, October.
  6. Harvey, Andrew, 1997. "Trends, Cycles and Autoregressions," Economic Journal, Royal Economic Society, vol. 107(440), pages 192-201, January.
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Cited by:
  1. Herrerias, M.J., 2013. "Seasonal anomalies in electricity intensity across Chinese regions," Applied Energy, Elsevier, vol. 112(C), pages 1548-1557.
  2. Dilaver, Zafer & Hunt, Lester C, 2011. "Modelling and forecasting Turkish residential electricity demand," Energy Policy, Elsevier, vol. 39(6), pages 3117-3127, June.

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