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

23 Pages Posted: 19 May 2007

See all articles by Arabinda Basistha

Arabinda Basistha

West Virginia University - College of Business & Economics

Abstract

Univariate correlated trend cycle models are highly sensitive to the specifications of breaks in the data. This paper argues, using Monte Carlo experiments, that a bivariate correlated unobserved components (UC) framework with breaks delivers substantially more accurate results for the trend-cycle parameters than the corresponding univariate frameworks in a finite sample size. The paper estimates stochastic trend and cyclical fluctuations in Canada from a bivariate UC model. Results show a fairly volatile stochastic trend after the drift break and the negative trend-cycle shock correlation are accounted for. The estimated cyclical component is large, persistent, and consistent with ECRI denoted Canadian recessions.

Suggested Citation

Basistha, Arabinda, Trend-Cycle Correlation, Drift Break and the Estimation of Trend and Cycle in Canadian GDP. Canadian Journal of Economics, Vol. 40, No. 2, pp. 584-606, May 2007. Available at SSRN: https://ssrn.com/abstract=986761 or http://dx.doi.org/10.1111/j.1365-2966.2007.00422.x

Arabinda Basistha (Contact Author)

West Virginia University - College of Business & Economics ( email )

Morgantown, WV 26506-6025
United States

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