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Trend-cycle decomposition: implications from an exact structural identification

Author

Listed:
  • Mardi Dungey
  • Jan P. A. M. Jacobs
  • Jing Tian
  • Simon van Norden

Abstract

A well-documented property of the Beveridge-Nelson trend-cycle decomposition is the perfect negative correlation between trend and cycle innovations. We show how this may be consistent with a structural model where trend shocks enter the cycle, or cyclic shocks enter the trend and that identification restrictions are necessary to make this structural distinction. A reduced-form unrestricted version such as that of Morley, Nelson and Zivot (2003) is compatible with either option, but cannot distinguish which is relevant. We discuss economic interpretations and implications using US real GDP data.

Suggested Citation

  • Mardi Dungey & Jan P. A. M. Jacobs & Jing Tian & Simon van Norden, 2013. "Trend-cycle decomposition: implications from an exact structural identification," Working Papers 13-22, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:13-22
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    References listed on IDEAS

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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access

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