Why Are the Beveridge-Nelson and Unobserved-Components Decompositions of GDP So Different?
AbstractThis paper reconciles two widely used decompositions of GDP into trend and cycle that yield starkly different results. The Beveridge-Nelson (BN) decomposition implies that a stochastic trend accounts for most of the variation in output, whereas the unobserved-components (UC) implies cyclical variation is dominant. Which is correct has broad implications for the relative importance of real versus nominal shocks. We show the difference arises from the restriction imposed in UC that trend and cycle innovations are uncorrelated. When this restriction is relaxed, the UC decomposition is identical to the BN decomposition. Furthermore, the zero-correlation restriction can be rejected for U.S. quarterly GDP, with the estimated correlation being -0.9. © 2003 President and Fellows of Harvard College and the Massachusetts Institute of Technology.
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Bibliographic InfoArticle provided by MIT Press in its journal Review of Economics and Statistics.
Volume (Year): 85 (2003)
Issue (Month): 2 (May)
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Web page: http://mitpress.mit.edu/journals/
Other versions of this item:
- Tom Doan, . "RATS programs to replicate Morley-Nelson-Zivot state space decomposition," Statistical Software Components RTZ00115, Boston College Department of Economics.
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