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Trend/cycle decomposition of regime-switching processes

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  • Morley, James
  • Piger, Jeremy
Abstract
We present a new approach to trend/cycle decomposition of time series that follow regime-switching processes. The proposed approach, which we label the "regime-dependent steady-state" (RDSS) decomposition, is motivated as the appropriate generalization of the Beveridge and Nelson decomposition [Beveridge, S., Nelson, C.R., 1981. A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the business cycle. Journal of Monetary Economics 7, 151-174] to the setting where the reduced-form dynamics of a given series can be captured by a regime-switching forecasting model. For processes in which the underlying trend component follows a random walk with possibly regime-switching drift, the RDSS decomposition is optimal in a minimum mean-squared-error sense and is more broadly applicable than directly employing an Unobserved Components model.

Suggested Citation

  • Morley, James & Piger, Jeremy, 2008. "Trend/cycle decomposition of regime-switching processes," Journal of Econometrics, Elsevier, vol. 146(2), pages 220-226, October.
  • Handle: RePEc:eee:econom:v:146:y:2008:i:2:p:220-226
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    References listed on IDEAS

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    10. Sinclair Tara M, 2009. "Asymmetry in the Business Cycle: Friedman's Plucking Model with Correlated Innovations," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 14(1), pages 1-31, December.
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