Inference on the Correlation between Permanent and Transitory Shocks for Unidentified Unobserved Components Models

20 Pages Posted: 23 Apr 2007 Last revised: 4 Jul 2008

See all articles by Daisuke Nagakura

Daisuke Nagakura

Keio University - Faculty of Economics

Date Written: July 1, 2007

Abstract

In this paper, I propose a simple methodology for inferring the correlation between permanent and transitory shocks in unidentified unobserved components (UC) models, where the correlation is not identified. However, I show that there is an upper bound of the correlation implied from the unrestricted ARIMA reduced form. I apply the proposed methodology to GDP data of six G7 countries. It is found that the implied upper bounds of the correlation range from -0:75 to 0:99 depending on countries. This means that the two shocks are highly negatively correlated for these G7 countries. The paper also shows that, in the estimation of UC models, imposing a proper identification restriction is important for the estimation of trend and cycle by the estimated UC models.

Keywords: Unobserved components model, Trend, Cycle, Business Cycle, Correlated Components

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JEL Classification: C13, C22, E32

Suggested Citation

Nagakura, Daisuke, Inference on the Correlation between Permanent and Transitory Shocks for Unidentified Unobserved Components Models (July 1, 2007). Available at SSRN: https://ssrn.com/abstract=981646 or http://dx.doi.org/10.2139/ssrn.981646

Daisuke Nagakura (Contact Author)

Keio University - Faculty of Economics ( email )

2-15-45 Mita, Ninato-ku
Tokyo 1088345
Japan

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