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The Role of Trends and Detrending in DSGE Models

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  • Andrle, Michal

Abstract

The paper discusses the role of stochastic trends in DSGE models and effects of stochastic detrending. We argue that explicit structural assumptions on trend behavior is convenient, namely for emerging countries. In emerging countries permanent shocks are an important part of business cycle dynamics. The reason is that permanent shocks spill over the whole frequency range, potentially, including business cycle frequencies. Applying high- or band-pass filter to obtain business cycle dynamics, however, does not eliminate the influence of permanent shocks on comovements of time series. The contribution of the paper is to provide a way how to calculate the role of permanent shocks on the detrended/ filtered business cycle population dynamics in a DSGE model laboratory using the frequency domain methods.

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File URL: http://mpra.ub.uni-muenchen.de/13289/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13289.

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Date of creation: 01 Aug 2008
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Handle: RePEc:pra:mprapa:13289

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Keywords: detrending; band-pass filter; spectral density; DSGE;

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  1. James Morley & Charles Nelson & Eric Zivot, 2002. "Why Are Beveridge-Nelson and Unobserved-Component Decompositions of GDP So Different?," Working Papers UWEC-2002-01, University of Washington, Department of Economics.
  2. Valle e Azevedo, João, 2007. "Interpretation of the Effects of Filtering Integrated Time Series," MPRA Paper 6574, University Library of Munich, Germany.
  3. Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1987. "Stochastic Trends and Economic Fluctuations," NBER Working Papers 2229, National Bureau of Economic Research, Inc.
  4. Peter N. Ireland & Scott Schuh, 2006. "Productivity and U.S. Macroeconomic Performance: Interpreting the Past and Predicting the Future with a Two-Sector Real Business Cycle Model," Boston College Working Papers in Economics 642, Boston College Department of Economics.
  5. Tommaso Proietti, 2006. "Trend-Cycle Decompositions with Correlated Components," Econometric Reviews, Taylor & Francis Journals, vol. 25(1), pages 61-84.
  6. Karl Whelan, 2001. "A two-sector approach to modeling U.S. NIPA data," Finance and Economics Discussion Series 2001-04, Board of Governors of the Federal Reserve System (U.S.).
  7. Mark Aguiar & Gita Gopinath, 2004. "Emerging Market Business Cycles: The Cycle is the Trend," NBER Working Papers 10734, National Bureau of Economic Research, Inc.
  8. Greenwood, J. & Hercowitz, Z. & Krusell, P., 1996. "Long-Run Implications of Investment-Specific Technological Change," RCER Working Papers 420, University of Rochester - Center for Economic Research (RCER).
  9. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Closing Small Open Economy Models," Departmental Working Papers 200115, Rutgers University, Department of Economics.
  10. Tommaso Proietti, 2008. "Structural Time Series Models for Business Cycle Analysis," CEIS Research Paper 109, Tor Vergata University, CEIS, revised 10 Jul 2008.
  11. Rochelle Edge & Michael Kiley & Jean-Philippe Laforte, 2005. "An estimated DSGE model of the US economy with an application to natural rate measures," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  12. Timothy Cogley & James M. Nason, 1991. "Effects of the Hodrick-Prescott filter on integrated time series," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
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Cited by:
  1. Jan Brùha, 2011. "An Empirical Small Labor Market Model for the Czech Economy," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 61(5), pages 434-449, November.
  2. Vasco J. Gabriel & Paul Levine & Joseph Pearlman & Bo Yang, 2010. "An Estimated DSGE Model of the Indian Economy," NIPE Working Papers 29/2010, NIPE - Universidade do Minho.
  3. Pietro Bonaldi & Andrés González & Diego Rodríguez, . "Importancia de las rigideces nominales y reales en Colombia: un enfoque de equilibrio general dinámico y estocástico," Borradores de Economia 591, Banco de la Republica de Colombia.

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