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

15 Pages Posted: 2 Nov 2016

See all articles by Michele Costola

Michele Costola

Goethe University Frankfurt - Research Center SAFE

Lorenzo Frattarolo

Ca Foscari University of Venice - Dipartimento di Economia

Marcella Lucchetta

Ca Foscari University of Venice

Antonio Paradiso

Ca Foscari University of Venice - Dipartimento di Economia

Date Written: September 20, 2016

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

Suggested Citation

Costola, Michele and Frattarolo, Lorenzo and Lucchetta, Marcella and Paradiso, Antonio, Do We Need a Stochastic Trend in Cay Estimation? Yes. (September 20, 2016). University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 24/WP/2016. Available at SSRN: https://ssrn.com/abstract=2862513

Michele Costola

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Lorenzo Frattarolo

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

Marcella Lucchetta (Contact Author)

Ca Foscari University of Venice ( email )

Venice
Italy

Antonio Paradiso

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

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