Garratt, Anthony and Robertson, D. and Wright, Stephen (2004) Permanent vs transitory components and economic fundamentals. Working Paper. Birkbeck, University of London, London, UK.
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Abstract
Any non-stationary series can be decomposed into permanent (or “trend”) and transitory (or “cycle”) components. Typically some atheoretic pre-filtering procedure is applied to extract the permanent component. This paper argues that analysis of the fundamental underlying stationary economic processes should instead be central to this process. We present a new derivation of multivariate Beveridge-Nelson permanent and transitory components, whereby the latter can be derived explicitly as a weighting of observable stationary processes. This allows far clearer economic interpretations. Different assumptions on the fundamental stationary processes result in distinctly different results; but this reflects deep economic uncertainty. We illustrate with an example using Garratt et al’s (2003a) small VECM model of the UK economy.
Metadata
| Item Type: | Monograph (Working Paper) |
|---|---|
| Additional Information: | BWPEF 0501 |
| Keyword(s) / Subject(s): | Multivariate Beveridge-Nelson, VECM, Economic Fundamentals, Decomposition |
| School: | Birkbeck Faculties and Schools > Faculty of Business and Law > Birkbeck Business School |
| Depositing User: | Administrator |
| Date Deposited: | 05 Apr 2019 08:50 |
| Last Modified: | 02 Aug 2023 17:50 |
| URI: | https://eprints.bbk.ac.uk/id/eprint/27049 |
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