A Steady-State Approach to Trend/Cycle Decomposition of Regime-Switching Processes

FRB St. Louis Working Paper No. 2004-006D

50 Pages Posted: 28 Jul 2005

See all articles by James Morley

James Morley

University of Sydney - School of Economics

Jeremy Piger

University of Oregon - Department of Economics

Date Written: June 2005

Abstract

In this paper, we present a new approach to trend/cycle decomposition under the assumption that the trend is the permanent component and the cycle is the transitory component of an integrated time series. The permanent component is defined as the steady-state level of the series, a definition that has exploitable forecasting implications useful for identification. We operationalize the steady-state approach for regime-switching processes and we use generated data from such processes to demonstrate the advantages of the steady-state approach over alternative approaches to trend/cycle decomposition. We then apply the steady-state approach to estimate the trend and cycle of U.S. real GDP implied by a regime-switching forecasting model. Our findings portray a very different picture of the business cycle than implied by more traditional methods.

Keywords: steady state, trend/cycle decomposition, nonlinear, regime switching

JEL Classification: C15, C22, E32

Suggested Citation

Morley, James and Piger, Jeremy M., A Steady-State Approach to Trend/Cycle Decomposition of Regime-Switching Processes (June 2005). FRB St. Louis Working Paper No. 2004-006D, Available at SSRN: https://ssrn.com/abstract=761025 or http://dx.doi.org/10.2139/ssrn.761025

James Morley (Contact Author)

University of Sydney - School of Economics ( email )

Rm 607 Social Sciences Building
The University of Sydney
Sydney, NSW 2006 2008
Australia

HOME PAGE: http://https://sites.google.com/site/jamescmorley/

Jeremy M. Piger

University of Oregon - Department of Economics ( email )

Eugene, OR 97403
United States

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