An Unobserved Components Model that Yields Business and Medium-Run Cycles
We wish to thank the editor and two anonymous referees whose comments have substantially improved the paper. We thank James Cover, Walter Enders, James Morley, James Nason, Charles Nelson, Tara Sinclair, and seminar participants at the University of Alabama, University of Kansas, and 2010 annual conference of the society for Studies in Nonlinear Dynamics and Econometrics for helpful comments. Jun Ma gratefully acknowledges the financial support from summer research program of Culverhouse College of Commerce & Business Administration at the University of Alabama. The usual disclaimer applies.
We generalize the unobserved components (UC) model to allow the permanent component to have different dynamics than the transitory components when decomposing U.S. economic activity using a multivariate UC model of (log) output, consumption, and investment. We find that these proposed dynamics in the permanent component are statistically significant and distinct from those of the transitory components. Our approach provides an alternative explanation for the growth cycles identified by Comin and Gertler (2006) that is related to the cyclical movements in technology, in a framework consistent with the Beveridge and Nelson (1981) decomposition.