The relative importance of permanent and transitory components: identification and some theoretical bounds

Danny Quah

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Much macroeconometric discussion has recently emphasized the economic significance of the size of the permanent component in GNP. Consequently, a large literature has developed that tries to estimate this magnitude--measured, essentially, as the spectral density of increments in GNP at frequency zero. This paper shows that unless the permanent component is a random walk this attention has been misplaced: in general, that quantity does not identify the magnitude of the permanent component. Further, by developing bounds on reasonable measures of this magnitude, the paper shows that a random walk specification is biased towards establishing the permanent component as important.

JEL-codes: C50 E00 (search for similar items in EconPapers)
Pages: 24 pages
Date: 1991-10-01
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:2333

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