Why Are Beveridge-Nelson and Unobserved-Component Decompositions of GDP So Different?
AbstractThis paper reconciles two widely-used decompositions of GDP into trend and cycle that yield starkly different results. Beveridge-Nelson (BN) implies that a stochastic trend accounts for most of the variation in output, while 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.
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Bibliographic InfoPaper provided by University of Washington, Department of Economics in its series Working Papers with number UWEC-2002-01.
Date of creation: Jan 2002
Date of revision:
Publication status: Published in Review of Economics and Statistics, Volume LXXXV, No. 2. May, 2003
Other versions of this item:
- James Morley & Charles Nelson & Eric Zivot, 2003. "Why are Beveridge-Nelson and Unobserved-component decompositions of GDP so Different?," Working Papers UWEC-2002-18-P, University of Washington, Department of Economics.
- James C. Morley & Charles Nelson & Eric Zivot, 2000. "Why Are Beveridge-Nelson and Unobserved-Component Decompositions of GDP So Different?," Working Papers 0013, University of Washington, Department of Economics.
- James C. Morley & Charles Nelson & Eric Zivot, 2000. "Why Are Beveridge-Nelson and Unobserved-Component Decompositions of GDP So Different?," Discussion Papers in Economics at the University of Washington 0013, Department of Economics at the University of Washington.
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