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Implications of Two Measures of Persistence for Correlation Between Permanent and Transitory Shocks in U.S. Real GDP

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  • Daisuke Nagakura
  • Eric Zivot

Abstract

Conventionally, shocks to permanent and transitory components in the unobserved components (UC) model for the log of real GDP are assumed to be uncorrelated. This assumption is mainly for identification of model parameters. In this paper, we show important implications of two popular measures of persistence for the correlation between permanent and transitory shocks in the UC model, and demonstrate that the correlation is negative for the log of U.S. real GDP under a very general specification of the cycle process.

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File URL: http://faculty.washington.edu/ezivot/research/trendcyclecorrelation.pdf
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Bibliographic Info

Paper provided by University of Washington, Department of Economics in its series Working Papers with number UWEC-2007-07.

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Date of creation: Jan 2007
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Handle: RePEc:udb:wpaper:uwec-2007-07

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Cited by:
  1. Kum Hwa Oh & Eric Zivot & Drew Creal, 2006. "The Relationship between the Beveridge-Nelson Decomposition andUnobserved Component Models with Correlated Shocks," Working Papers, University of Washington, Department of Economics UWEC-2006-16-FC, University of Washington, Department of Economics.
  2. Oh, Kum Hwa & Zivot, Eric & Creal, Drew, 2008. "The relationship between the Beveridge-Nelson decomposition and other permanent-transitory decompositions that are popular in economics," Journal of Econometrics, Elsevier, Elsevier, vol. 146(2), pages 207-219, October.

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