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Trend-Cycle Correlation, Drift Break and the Estimation of Trend and Cycle in Canadian GDP

  • Arabinda Basistha

    (West Virginia University)

This paper argues, using Monte Carlo experiments, that bivariate correlated unobserved components (UC) framework delivers more accurate estimation results for trend and cycle parameters than the univariate framework. The paper estimates stochastic trend and cyclical fluctuations in Canada from a bivariate, correlated UC model with drift breaks. In contrast to the univariate results, bivariate estimation shows a fairly volatile stochastic trend after accounting for the drift break along with a negative trend-cycle shock correlation. The estimated cyclical component is moderately large, persistent and consistent with ECRI denoted Canadian recessions.

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File URL: http://be.wvu.edu/phd_economics/pdf/05-07.pdf
File Function: First version, 2005
Download Restriction: no

Paper provided by Department of Economics, West Virginia University in its series Working Papers with number 05-07 Classification- JEL: E31, E32, E50.

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Length: 25 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:wvu:wpaper:05-07
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Web page: http://be.wvu.edu/phd_economics/
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  1. Andrew Levin & Jeremy Piger, 2003. "Is Inflation Persistence Intrinsic in Industrial Economies?," Computing in Economics and Finance 2003 298, Society for Computational Economics.
  2. Kuttner, Kenneth N, 1994. "Estimating Potential Output as a Latent Variable," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 361-68, July.
  3. St-Amant, P. & van Norden, S., 1997. "Measurement of the Output Gap: A Discussion of Recent Research at the Bank of Canada," Technical Reports 79, Bank of Canada.
  4. Watson, Mark W., 1986. "Univariate detrending methods with stochastic trends," Journal of Monetary Economics, Elsevier, vol. 18(1), pages 49-75, July.
  5. 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.
  6. Tatsuma Wada & Pierre Perron, 2005. "Trend and Cycles: A New Approach and Explanations of Some Old Puzzles," Computing in Economics and Finance 2005 252, Society for Computational Economics.
  7. Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers 1015, Cowles Foundation for Research in Economics, Yale University.
  8. Frédérick Demers, 2003. "The Canadian Phillips Curve and Regime Shifting," Working Papers 03-32, Bank of Canada.
  9. Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche 9552, Universite de Montreal, Departement de sciences economiques.
  10. BAI, Jushan & PERRON, Pierre, 1998. "Computation and Analysis of Multiple Structural-Change Models," Cahiers de recherche 9807, Universite de Montreal, Departement de sciences economiques.
  11. Harvey, A C & Jaeger, A, 1993. "Detrending, Stylized Facts and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(3), pages 231-47, July-Sept.
  12. Apel, Mikael & Jansson, Per, 1999. "A theory-consistent system approach for estimating potential output and the NAIRU," Economics Letters, Elsevier, vol. 64(3), pages 271-275, September.
  13. Harvey, A C, 1985. "Trends and Cycles in Macroeconomic Time Series," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(3), pages 216-27, June.
  14. Basistha, Arabinda & Nelson, Charles R., 2007. "New measures of the output gap based on the forward-looking new Keynesian Phillips curve," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 498-511, March.
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