The Relative Importance of Permanent and Transitory Components: Identification and Some Theoretical Bounds
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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Volume (Year): 60 (1992)
Issue (Month): 1 (January)
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