Publication Date
Financial Markets Group Discussion Papers DP 127
The paper analyzes identification issues raised by general dynamic specifications of the trend, as opposed to the conventional random walk, in both univariate and multivariate models of permanent-transitory components. General trends are interpreted as representing processes of diffusion of technical change. In this framework, we prove that a I91) process admits permanent-transitory decompositions where the trend and the covariance between trend and stationary components are arbitrary. Moreover, we show that ARMA approximations to diffusion processes can generate non-fundamental moving average representations, thereby posing a non-standard identification problem of the relevant impulse-response functions.
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