Trend Dominance in Macroeconomic Fluctuations

This paper investigates multivariate Beverage-Nelson decomposition of the key macro aggregate data. Among others, most importantly we find (a) inflation seems to be dominated by its trend component, and, perhaps as a result of this, the short-term interest rate is also trend dominated; and (b) consumption also seems to be dominated by its trend component perhaps due to consumption smoothing as the permanent income hypothesis suggests. What is new here is that, although the difficulty of rejecting a unit root for these variables has been long recognized in the literature, we show indeed these unit root processes account for the large share of the variable fluctuations. This raises a concern about the convention that the non-stationary data is detrended in the standard DSGE type structural estimation, in the sense that a significant portion of data variation actually may come from the trend components.