MODELING CYCLICAL BEHAVIOR WITH DIFFERENTIAL-DIFFERENCE EQUATIONS IN AN UNOBSERVED COMPONENTS FRAMEWORK

Marcus Chambers and Joanne S. McGarry

Econometric Theory, 2002, vol. 18, issue 2, 387-419

Abstract: This paper considers a continuous time unobserved components model in which the cyclical component follows a differential-difference equation whereas the trend and seasonal components follow more standard differential equations. Estimation of the parameters of the model with either a stock or a flow variable is analyzed using a frequency domain Gaussian estimator whose asymptotic properties are derived paying particular attention to the role of a truncation parameter that arises in the practical computation of the spectral density function. The results of a simulation exercise, which assesses the finite sample performance of the estimator, are also provided.

Date: 2002
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