Do We Need a Stochastic Trend in Cay Estimation? Yes.

Abstract

The paper investigates the importance of modeling in cay estimations from a statistical and economic perspective by observing the stochastic trend, a thus far neglected component. In order to do this, we perform an empirical analysis on US secular annual data from 1900 to 2015 considering the cay with non-durables and services and the cay with total consumption expenditure. Findings show the usefulness of including the stochastic trend in cay estimation. Furthermore, out-of-sample statistical and economic significance tests show the ability of the cay model with trend to outperform the traditional cay measure.

Keywords: Cay, Trend, State-Space Model

JEL Classification: E21, C32