The Clark Model with Correlated Components

48 Pages Posted: 25 Jan 2006

See all articles by Kum Hwa Oh

Kum Hwa Oh

University of Washington - Department of Economics

Eric Zivot

University of Washington - Department of Economics

Date Written: January 16, 2006

Abstract

This paper is an extension of "Why are the Beveridge-Nelson and Unobserved-Components Decompositions of GDP so Different?" (Morley, Nelson, and Zivot, 2003) to Clark's double-drift unobserved components model. We show that the reduced-form of the double-drift model is an ARIMA(2,2,3) model, and we discuss various restrictions for identifying the parameters of the double-drift model with correlated components. When shocks to the smooth trend and cycle are allowed to be correlated but forced to be uncorrelated with shocks to the drift, the Kalman Filter estimates of the trend and cycle are identical to the estimates from the Beveridge-Nelson decomposition from the ARIMA(2,2,3) model and are similar to the estimates from Morley, Nelson and Zivot. We also find that alternative identification schemes are not supported by the data.

Keywords: Beveridge-Nelson Decomposition, identification, Trend-Cycle Decomposition, Unobserved Components Model

JEL Classification: C22, E32

Suggested Citation

Oh, Kum Hwa and Zivot, Eric W., The Clark Model with Correlated Components (January 16, 2006). Available at SSRN: https://ssrn.com/abstract=877398 or http://dx.doi.org/10.2139/ssrn.877398

Kum Hwa Oh

University of Washington - Department of Economics ( email )

Box 353330
Seattle, WA 98195-3330
United States

Eric W. Zivot (Contact Author)

University of Washington - Department of Economics ( email )

Box 353330
Seattle, WA 98195-3330
United States
206-543-6715 (Phone)
206-685-7477 (Fax)