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TREND–CYCLE–SEASONAL INTERACTIONS: IDENTIFICATION AND ESTIMATION

Published online by Cambridge University Press:  06 February 2018

Irma Hindrayanto
Affiliation:
De Nederlandsche Bank
Jan P.A.M. Jacobs
Affiliation:
University of Groningen, University of Tasmania, CAMA, and CIRANO
Denise R. Osborn
Affiliation:
University of Manchester, University of Tasmania, and CAMA
Jing Tian
Affiliation:
University of Tasmania
Corresponding
E-mail address:
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Abstract

Economists typically use seasonally adjusted data in which the assumption is imposed that seasonality is uncorrelated with trend and cycle. The importance of this assumption has been highlighted by the Great Recession. The paper examines an unobserved components model that permits nonzero correlations between seasonal and nonseasonal shocks. Identification conditions for estimation of the parameters are discussed from the perspectives of both analytical and simulation results. Applications to UK household consumption expenditures and US employment reject the zero correlation restrictions and also show that the correlation assumptions imposed have important implications about the evolution of the trend and cycle in the post-Great Recession period.

Type
Articles
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.
Copyright
© Cambridge University Press 2018

Footnotes

We thank Siem Jan Koopman and Kai Ming Lee for helpful discussions. We also thank Ralph Snyder, Ken Wallis, Tom Wansbeek, William A. Barnett, and an associate editor for detailed comments on a previous version of the paper. However, any errors are entirely the responsibility of the authors. Views expressed in this paper do not necessarily reflect those of the Dutch Central Bank.

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