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

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Author Info
Rao, B. Bhaskara

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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 paper suggests that both methodologies are useful and they may perform differently in different models. This paper provides a few guidelines to the applied economists to understand these alternative methods.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3580.

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Date of creation: 16 Jun 2007
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Handle: RePEc:pra:mprapa:3580

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Related research
Keywords: Stochastic and Deterministic Trends; Bai-Perron Tests; STAMP; Structural Time Series Models.;

Find related papers by JEL classification:
C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - General
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation
C00 - Mathematical and Quantitative Methods - - General - - - General
C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. John Dimitropoulos & Lester C. Hunt & Guy Judge, 2005. "Estimating underlying energy demand trends using UK annual data," Applied Economics Letters, Taylor and Francis Journals, vol. 12(4), pages 239-244, March. [Downloadable!] (restricted)
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  2. 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.
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  3. Perron, Pierre & Qu, Zhongjun, 2006. "Estimating restricted structural change models," Journal of Econometrics, Elsevier, vol. 134(2), pages 373-399, October. [Downloadable!] (restricted)
  4. 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. [Downloadable!]
  5. Harvey, Andrew, 1997. "Trends, Cycles and Autoregressions," Economic Journal, Royal Economic Society, vol. 107(440), pages 192-201, January. [Downloadable!] (restricted)
  6. 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. [Downloadable!]
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