The validity of trend-cycle decomposition using unobserved component model: Monte Carlo evidence

Kosei Fukuda ()

Applied Economics Letters, 2008, vol. 15, issue 5, 367-369

Abstract: The validity of trend-cycle decomposition using the unobserved component model is examined via Monte Carlo simulations. It is shown that the nearer to the unit-root process the assumed cycle component and/or the larger the assumed innovation covariance, the more frequent the occurrence of the boundary estimate for the innovation covariance, that the nearer to the unit-root process the assumed cycle component in the case of applying the model with zero restriction on the innovation covariance, the more frequent the occurrence of a linear time trend in the trend estimation, and that a linear time trend cannot be obtained from the model without zero restriction.

Date: 2008
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DOI: 10.1080/13504850600706164

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