Deterministic and stochastic trends in the time series models: A guide for the applied economist

B. Rao

MPRA Paper from University Library of Munich, Germany

Abstract: Applied economists working with time series data face a dilemma in selecting between models with deterministic and stochastic trends. While models with deterministic trends are widely used, models with stochastic trends are not so well known. In an influential paper Harvey (1997) strongly advocates a structural time series approach with stochastic trends in place of the widely used autoregressive models based on unit root tests and cointegration techniques. Therefore, it is important to understand their relative merits. This paper suggests that both methodologies are useful and they may perform differently in different models. This paper provides a few guidelines to the applied economists to understand these alternative methods.

Keywords: Stochastic and Deterministic Trends; Bai-Perron Tests; STAMP; Structural Time Series Models (search for similar items in EconPapers)
JEL-codes: C00 C10 C13 C20 C22 (search for similar items in EconPapers)
Date: 2007-06-16
New Economics Papers: this item is included in nep-ecm and nep-ets
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Citations: View citations in EconPapers (1)

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