THE TWO INTERPRETATIONS OF THE BEVERIDGE–NELSON DECOMPOSITION

James Morley

61 citations0/0 files storedMacroeconomic Dynamics

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Monetary Policy and Economic Impact Forecasting Techniques and Applications Statistical and numerical algorithms

Abstract

The Beveridge–Nelson decomposition calculates trend and cycle for an integrated time series. However, there are two ways to interpret the results from the decomposition. One interpretation is that the optimal long-run forecast (minus any deterministic drift) used to calculate the Beveridge–Nelson trend corresponds to an estimate of an unobserved permanent component. The other interpretation is that the optimal long-run forecast defines an observable permanent component. This paper examines some issues surrounding these two interpretations and provides empirical support for interpreting the Beveridge–Nelson trend as an estimate when considering macroeconomic data.

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References

1978Specification Tests in Econometrics 1993Tests for Parameter Instability and Structural Change With Unknown Change Point 1990Forecasting, Structural Time Series Models and the Kalman Filter 1988The Dynamic Effects of Aggregate Demand and Supply Disturbances 1981A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the ‘business cycle’1986Univariate detrending methods with stochastic trends 2003Why Are the Beveridge-Nelson and Unobserved-Components Decompositions of GDP So Different?1992The Relative Importance of Permanent and Transitory Components: Identification and Some Theoretical Bounds

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2017A Bayesian Model Comparison for Trend‐Cycle Decompositions of Output 2008The relationship between the Beveridge–Nelson decomposition and other permanent–transitory decompositions that are popular in economics 2008Trend/cycle decomposition of regime-switching processes 2016Intuitive and Reliable Estimates of the Output Gap from a Beveridge-Nelson Filter 2010

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