A note on the two assumptions of standard unobserved components models

Daisuke Nagakura

Economics Letters, 2008, vol. 100, issue 1, pages 123-125

Abstract: In this note, I consider a general class of unobserved components (UC) models and derive a relevant inequality. This inequality implies that either of the two assumptions of standard UC models, namely, a random walk trend and uncorrelated shocks, is not satisfied if the impulse response measure introduced by [Campbell, J.Y. and N.G. Mankiw, 1987a. Are output fluctuations transitory? Quarterly Journal of Economics 102, 857-880, Campbell, J.Y. and N.G. Mankiw, 1987b. Permanent and transitory components in macroeconomic fluctuations, American Economic Review (Papers and Proceedings) 77, 111-117] is greater than 1.

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