The Relative Importance of Permanent and Transitory Components in Macroeconomic Time Series

Abstract:     
In a recent paper, Morley, Nelson and Zivot (2003) provide a unified framework for decomposing integrated time series into permanent and transitory components. We apply this decomposition to four U.S. time series for which there is strong evidence of a unit root. Our results suggest that shocks to these macroeconomic time series are predominately permanent. We also examine the consequences of using inappropriate methods of decomposing nonstationary time series into trend and cycle. We find that these methods systematically overestimate the importance of transitory shocks.

Keywords: decomposition, business cycle, unobserved components

JEL Classifications: C32, E32

Working Paper Series