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The multivariate simultaneous unobserved components model and identification via heteroskedasticity

Mengheng Li () and Ivan Mendieta-Muñoz

No 2019/08, Working Paper Series from Economics Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: We propose a multivariate simultaneous unobserved components framework to determine the two-sided interactions between structural trend and cycle innovations. We relax the standard assumption in unobserved components models that trends are only driven by permanent shocks and cycles are only driven by transitory shocks by considering the possible spillover effects between structural innovations. The direction of spillover has a structural interpretation, whose identification is achieved via heteroskedasticity. We provide identifiability conditions and develop an efficient Bayesian MCMC procedure for estimation. Empirical implementations for both Okun’s law and the Phillips curve show evidence of significant spillovers between trend and cycle components.

Keywords: Unobserved components; identification via heteroskedasticity; trends and cycles; permanent and transitory shocks; state space models; spillover structural effects (search for similar items in EconPapers)
JEL-codes: C11 C32 E31 E32 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-mac
Date: 2019-06-04
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