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Single Source of Error State Space Approach to the Beveridge Nelson Decomposition

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  • Chin Nam Low
  • Heather Anderson
  • Ralph Snyder

Abstract

The use of the Beveridge Nelson decomposition in macroeconomic analysis involves the truncation and estimation of infinite weighted sums of random variables, whereas the single source of error (SSE) state space approach provides a simple and effective framework that leads to exactly the same decomposition. Thus, although the (SSE) approach was originally developed as a forecasting tool, it can also be used as a macroeconomic tool, providing a straightforward decomposition of the series into trend and cyclical components, and simplifying the calculation of the relative importance of permanent and temporary shocks.

Suggested Citation

  • Chin Nam Low & Heather Anderson & Ralph Snyder, 2004. "Single Source of Error State Space Approach to the Beveridge Nelson Decomposition," Econometric Society 2004 Australasian Meetings 242, Econometric Society.
    • Handle: RePEc:ecm:ausm04:242
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    1. Beveridge, Stephen & Nelson, Charles R., 1981. "A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the `business cycle'," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 151-174.
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    Cited by:

    1. M. Dungey & J. P. A. M. Jacobs & J. Tian & S. van Norden, 2013. "On the correspondence between data revision and trend-cycle decomposition," Applied Economics Letters, Taylor & Francis Journals, vol. 20(4), pages 316-319, March.
    2. Günes Kamber & James Morley & Benjamin Wong, 2018. "Intuitive and Reliable Estimates of the Output Gap from a Beveridge-Nelson Filter," The Review of Economics and Statistics, MIT Press, vol. 100(3), pages 550-566, July.
    3. Kamil, Nazrol & Masih, Mansur, 2016. "Shari’ah (islamic)compliant investments in Malaysia: influences of selected stock indices and their trend/cycle decomposition equity," MPRA Paper 100955, University Library of Munich, Germany.
    4. Basistha, Arabinda & Kurov, Alexander, 2010. "Estimating earnings trend using unobserved components framework," Economics Letters, Elsevier, vol. 107(1), pages 55-57, April.
    5. Kum Hwa Oh & Eric Zivot & Drew Creal, 2006. "The Relationship between the Beveridge-Nelson Decomposition andUnobserved Component Models with Correlated Shocks," Working Papers UWEC-2006-16-FC, University of Washington, Department of Economics.
    6. Chin Nam Low & Heather Anderson & Ralph Snyder, 2006. "Beveridge-Nelson Decomposition with Markov Switching," Melbourne Institute Working Paper Series wp2006n14, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    7. Pagan, Adrian & Robinson, Tim, 2022. "Excess shocks can limit the economic interpretation," European Economic Review, Elsevier, vol. 145(C).
    8. Chew Lian Chua & G. C. Lim & Sarantis Tsiaplias, 2012. "A latent variable approach to forecasting the unemployment rate," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 31(3), pages 229-244, April.
    9. de Silva, Ashton & Hyndman, Rob J. & Snyder, Ralph, 2009. "A multivariate innovations state space Beveridge-Nelson decomposition," Economic Modelling, Elsevier, vol. 26(5), pages 1067-1074, September.
    10. Adrian Pagan & Tim Robinson, 2020. "Too Many Shocks Spoil the Interpretation," Melbourne Institute Working Paper Series wp2020n02, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    11. A. R. Pagan & Mr. Douglas Laxton & Mr. Luis Catão, 2008. "Monetary Transmission in an Emerging Targeter: The Case of Brazil," IMF Working Papers 2008/191, International Monetary Fund.
    12. Mardi Dungey & Jan P.A.M. Jacobs & Jing Jian & Simon van Norden, 2013. "Trend-Cycle Decomposition: Implications from an Exact Structural Identification," CIRANO Working Papers 2013s-23, CIRANO.
    13. Luis A.V. Catão & Adrian Pagan, 2011. "The Credit Channel and Monetary Transmission in Brazil and Chile: A Structured VAR Approach," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Felipe Céspedes & Roberto Chang & Diego Saravia (ed.),Monetary Policy under Financial Turbulence, edition 1, volume 16, chapter 5, pages 105-144, Central Bank of Chile.
    14. Philip Liu, 2007. "Stabilizing The Australian Business Cycle: Good Luck Or Good Policy?," CAMA Working Papers 2007-24, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    15. Heather M Anderson & Farshid Vahid, 2010. "VARs, Cointegration and Common Cycle Restrictions," Monash Econometrics and Business Statistics Working Papers 14/10, Monash University, Department of Econometrics and Business Statistics.
    16. 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, vol. 146(2), pages 207-219, October.
    17. Agbeyegbe, Terence D., 2020. "Bayesian analysis of output gap in Barbados," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 1(1).

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    More about this item

    Keywords

    Single Source of Error; Beveridge Nelson Decomposition; State-space;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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