The Relative Importance of Permanent and Transitory Components: Identi- Fication and Some Theoretical Bounds

24 Pages Posted: 27 Jun 2007 Last revised: 17 Apr 2023

See all articles by Danny Quah

Danny Quah

National University of Singapore (NUS), Lee Kuan Yew School of Public Policy, Students

Date Written: June 1991

Abstract

Much macroeconometric discussion has recently emphasized the economic significance of the size of the permanent component in GNP. Consequently, a large literature has developed that tries to estimate this magnitude measured, essentially, as the spectral density of increments in GNP at frequency zero. This paper shows that unless the permanent component is a random walk this attention has been misplaced: in general, that quantity does not identify the magnitude of the permanent component. Further, by developing bounds on reasonable measures of this magnitude, the paper shows that a random walk specification is biased towards establishing the permanent component as important.

Suggested Citation

Quah, Danny, The Relative Importance of Permanent and Transitory Components: Identi- Fication and Some Theoretical Bounds (June 1991). NBER Working Paper No. t0106, Available at SSRN: https://ssrn.com/abstract=995150

Danny Quah (Contact Author)

National University of Singapore (NUS), Lee Kuan Yew School of Public Policy, Students ( email )

Singapore
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