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.
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 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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