Discussion Paper Series 2008-E-24

How Are Shocks to Trend and Cycle Correlated? A Simple Methodology for Unidentified Unobserved Components Models

Daisuke Nagakura

In this paper, we propose a simple methodology for investigating how shocks to trend and cycle are correlated in unidentified unobserved components models, in which the correlation is not identified. The proposed methodology is applied to U.S. and U.K. real GDP data. We find that the correlation parameters are negative for both countries. We also investigate how changing the identification restriction results in different trend and cycle estimates. It is found that estimates of the trend and cycle can vary substantially depending on the identification restrictions imposed.

Keywords: Business Cycle Analysis; Trend; Cycle; Permanent Component; Transitory Component; Unobserved Components Model

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2008 Bank of Japan All Rights Reserved.

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