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The Relative Importance of Permanent and Transitory Components: Identification and Some Theoretical Bounds

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  • Danny Quah

Abstract

Much macroeconometric discussion has recently emphasised 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.

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  • Danny Quah, 1991. "The Relative Importance of Permanent and Transitory Components: Identification and Some Theoretical Bounds," FMG Discussion Papers dp126, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp126
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    1. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
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