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Original Articles

The validity of trend-cycle decomposition using unobserved component model: Monte Carlo evidence

Pages 367-369 | Published online: 25 Mar 2008
 

Abstract

The validity of trend-cycle decomposition using the unobserved component model is examined via Monte Carlo simulations. It is shown that the nearer to the unit-root process the assumed cycle component and/or the larger the assumed innovation covariance, the more frequent the occurrence of the boundary estimate for the innovation covariance, that the nearer to the unit-root process the assumed cycle component in the case of applying the model with zero restriction on the innovation covariance, the more frequent the occurrence of a linear time trend in the trend estimation, and that a linear time trend cannot be obtained from the model without zero restriction.

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