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Why are Beveridge-Nelson and Unobserved-Component Decompositions of GDP so Different?

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  • Charles Nelson

    (University of Washington)

  • Eric Zivot

    (University of Washington)

Abstract

Two widely used methods of decomposing GDP into trend and cycle yield starkly different results. The unobserved component approach implies smooth trend with large, persistent cycle. In contrast, the Beveridge and Nelson (1981) approach implies most of the variation is attributable to trend. This conflict has been widely noted. It should surprise us that the two approaches produce very different trend-cycle decompositions since both are model-based. This paper attempts to find out why we do not, after decades of research, have a consistent picture of how variation in a series like real GDP should be allocated between trend and cycle.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0692.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:0692

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  1. Sichel, D.E., 1988. "Business Cycle Asymmetry: A Deeper Look," Papers, Princeton, Department of Economics - Financial Research Center 85, Princeton, Department of Economics - Financial Research Center.
  2. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(5), pages 893-920, October.
  3. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
  4. 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, Elsevier, vol. 7(2), pages 151-174.
  5. Daniel E. Sichel, 1992. "Inventories and the three phases of the business cycle," Working Paper Series / Economic Activity Section, Board of Governors of the Federal Reserve System (U.S.) 128, Board of Governors of the Federal Reserve System (U.S.).
  6. Beaudry, Paul & Koop, Gary, 1993. "Do recessions permanently change output?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 31(2), pages 149-163, April.
  7. Neftci, Salih N, 1984. "Are Economic Time Series Asymmetric over the Business Cycle?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 92(2), pages 307-28, April.
  8. Kim, C-J & Nelson, C-R, 1997. "Friedman's Plucking Model of Business Fluctuations : Tests and Estimates of Permanent and Transitory Components," Working Papers, University of Washington, Department of Economics 97-06, University of Washington, Department of Economics.
  9. Clark, Peter K, 1987. "The Cyclical Component of U.S. Economic Activity," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(4), pages 797-814, November.
  10. Harvey, A C, 1985. "Trends and Cycles in Macroeconomic Time Series," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 3(3), pages 216-27, June.
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