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The Relative Importance of Permanent and Transitory Components: Identification and Some Theoretical Bounds

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  • Quah, Danny

Abstract

Much macroeconometric discussion has recently emphasized the economic significance of the size of the permanent component in GNP. Consequently, a large literature has developed that tries to estimate this magnitude--measured, essentially, as the spectral density of increments in GNP at frequency zero. This paper shows that, unless the permanent component is a random walk, this attention has been misplaced: in general, that quantity does not identify the magnitude of the permanent component. Further, by developing bounds on reasonable measures of this magnitude, this paper shows that a random walk specification is biased toward establishing the permanent component as important. Copyright 1992 by The Econometric Society.

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  • Quah, Danny, 1992. "The Relative Importance of Permanent and Transitory Components: Identification and Some Theoretical Bounds," Econometrica, Econometric Society, vol. 60(1), pages 107-118, January.
  • Handle: RePEc:ecm:emetrp:v:60:y:1992:i:1:p:107-18
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