On the correlations of trend–cycle errors

Tatsuma Wada

Economics Letters, 2012, vol. 116, issue 3, 396-400

Abstract: This note provides explanations for an unexpected result, namely, the estimated parameter of the correlation coefficient of the trend shock and cycle shock in the state–space model is almost always (positive or negative) unity, even when the true variance of the trend shock is zero. It is shown that the set of the true parameter values lies on the restriction that requires the variance–covariance matrix of the errors to be nonsingular, therefore, almost always the likelihood function has its (constrained) global maximum on the boundary where the correlation coefficient implies perfect correlation.

Keywords: Trend–cycle decomposition; Unit-root; Maximum likelihood (search for similar items in EconPapers)
JEL-codes: C13 C22 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165176512001589
Full text for ScienceDirect subscribers only

Related works:
Working Paper: On the Correlations of Trend-Cycle Errors (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:116:y:2012:i:3:p:396-400

DOI: 10.1016/j.econlet.2012.04.028

Access Statistics for this article

Economics Letters is currently edited by Economics Letters Editorial Office

More articles in Economics Letters from Elsevier
Bibliographic data for series maintained by Catherine Liu ().