Trend-Cycle Decomposition: Implications from an Exact Structural Identification

34 Pages Posted: 25 May 2013

See all articles by Mardi Dungey

Mardi Dungey

University of Cambridge - Cambridge Endowment for Research in Finance (CERF)

Jan P. A. M. Jacobs

University of Groningen - Faculty of Economics and Business

Jing Tian

University of Tasmania; Financial Research Network (FIRN)

Simon van Norden

HEC Montreal - Department of Finance; CIRANO; University of Montreal - Center for Interuniversity Research in Econometrics

Date Written: May 17, 2013

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.

Keywords: trend-cycle decomposition, data revision, state-space form

JEL Classification: C22, C53, C82

Suggested Citation

Dungey, Mardi and Jacobs, Jan P.A.M. and Tian, Jing and van Norden, Simon, Trend-Cycle Decomposition: Implications from an Exact Structural Identification (May 17, 2013). FRB of Philadelphia Working Paper No. 13-22. Available at SSRN: https://ssrn.com/abstract=2269216 or http://dx.doi.org/10.2139/ssrn.2269216

Mardi Dungey (Contact Author)

University of Cambridge - Cambridge Endowment for Research in Finance (CERF) ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

HOME PAGE: http://www.dungey.bigpondhosting.com

Jan P.A.M. Jacobs

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

Jing Tian

University of Tasmania ( email )

French Street
Sandy Bay
Tasmania, 7250
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Simon Van Norden

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6781 (Phone)
514-340-5632 (Fax)

HOME PAGE: http://svannorden.org

CIRANO ( email )

2020 rue University, 25th floor
Montreal H3C 3J7, Quebec
Canada

HOME PAGE: http://svannorden.org

University of Montreal - Center for Interuniversity Research in Econometrics ( email )

C.P. 6128, Succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada

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