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The validity of trend-cycle decomposition using unobserved component model: Monte Carlo evidence

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  • Kosei Fukuda

Abstract

The validity of trend-cycle decomposition using the unobserved component model is examined via Monte Carlo simulations. It is shown that the nearer to the unit-root process the assumed cycle component and/or the larger the assumed innovation covariance, the more frequent the occurrence of the boundary estimate for the innovation covariance, that the nearer to the unit-root process the assumed cycle component in the case of applying the model with zero restriction on the innovation covariance, the more frequent the occurrence of a linear time trend in the trend estimation, and that a linear time trend cannot be obtained from the model without zero restriction.

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  • Kosei Fukuda, 2008. "The validity of trend-cycle decomposition using unobserved component model: Monte Carlo evidence," Applied Economics Letters, Taylor & Francis Journals, vol. 15(5), pages 367-369.
    • Handle: RePEc:taf:apeclt:v:15:y:2008:i:5:p:367-369
    DOI: 10.1080/13504850600706164
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    Cited by:

    1. Fukuda, Kosei, 2009. "Measuring major and minor cycles in univariate economic time series," Economic Modelling, Elsevier, vol. 26(5), pages 1093-1100, September.

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