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Trend Dominance in Macroeconomic Fluctuations

Author

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  • Katsuyuki Shibayama
Abstract
This paper investigates multivariate Beverage-Nelson decomposition of the key macro aggregate data. Among others, most importantly we find (a) inflation seems to be dominated by its trend component, and, perhaps as a result of this, the short-term interest rate is also trend dominated; and (b) consumption also seems to be dominated by its trend component perhaps due to consumption smoothing as the permanent income hypothesis suggests. What is new here is that, although the difficulty of rejecting a unit root for these variables has been long recognized in the literature, we show indeed these unit root processes account for the large share of the variable fluctuations. This raises a concern about the convention that the non-stationary data is detrended in the standard DSGE type structural estimation, in the sense that a significant portion of data variation actually may come from the trend components.

Suggested Citation

  • Katsuyuki Shibayama, 2015. "Trend Dominance in Macroeconomic Fluctuations," Studies in Economics 1518, School of Economics, University of Kent.
    • Handle: RePEc:ukc:ukcedp:1518
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    References listed on IDEAS

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    More about this item

    Keywords

    Beveridge-Nelson Decomposition; DSGE; VECM; Detrending;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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