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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, the paper shows that a random walk specification is biased towards establishing the permanent component as important.

Suggested Citation

  • Quah, Danny, 1991. "The relative importance of permanent and transitory components: identification and some theoretical bounds," LSE Research Online Documents on Economics 2333, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:2333
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    File URL: http://eprints.lse.ac.uk/2333/
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    References listed on IDEAS

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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.
    2. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
    3. Quah, Danny, 1990. "Permanent and Transitory Movements in Labor Income: An Explanation for "Excess Smoothness" in Consumption," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 449-475, June.
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    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General

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