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How Can We Extract a Fundamental Trend from an Economic Time- Series?

Author

Listed:
  • Higo, Masahiro

    (Bank of Japan)

  • Nakada, Sachiko-Kuroda

    (Bank of Japan)

Abstract

This paper attempts to extract a fundamental trend, which we call a " trend-cycle component," from an economic time-series. The "trend-cycle component" consists of a medium-term business cycle component and a long- term trend component. The objective is to eliminate the short-term irregular and seasonal variations that hide a fundamental trend in an economic time-series. We test five different time-series methods. Among them, the Henderson moving average (which is incorporated in an X-12- ARIMA seasonal adjustment program), the Band-Pass filter (which utilizes a Fourier transformation), and the DECOMP are found to be effective in extracting a "trend-cycle component" with a cyclical period longer than 1 .5 years. However, no method is found to be effective in extracting a " long-term trend component" with a cyclical period longer than that of a medium-term business cycle. Although the HP filter is somewhat successful , it still contains a component with a cyclical period of about three years that corresponds to a business cycle. These methods are useful for forecasting a wide variety of economic variables because they reveal a fundamental trend in the time series. In addition, statistical programs are available for easy application. They have, however, a few shortcomings. First, it is often difficult to provide a meaningful economic interpretation of the revealed characteristics of the "trend- cycle component." Second, the addition of new data can change the estimation results. In particular, an extracted component around the end of a sample period is likely to be revised with new data. Special caution is in order, therefore, in interpreting the estimation results and forecasting the time series when the data exhibit large variations. In this case, comparing the results of different methods provides a useful way to assess the reliability of an extracted "trend-cycle component."

Suggested Citation

  • Higo, Masahiro & Nakada, Sachiko-Kuroda, 1998. "How Can We Extract a Fundamental Trend from an Economic Time- Series?," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 16(2), pages 61-111, December.
  • Handle: RePEc:ime:imemes:v:16:y:1998:i:2:p:61-111
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    References listed on IDEAS

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    1. Yutaka Soejima, 1995. "A Unit Root Test with Structural Change for Japanese Macroeconomic Variables," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 13(1), pages 53-68, July.
    2. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-248, April.
    3. Michael F. Bryan & Stephen G. Cecchetti, 1994. "Measuring Core Inflation," NBER Chapters, in: Monetary Policy, pages 195-219, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Lisa Sella & Gianna Vivaldo & Andreas Groth & Michael Ghil, 2016. "Economic Cycles and Their Synchronization: A Comparison of Cyclic Modes in Three European Countries," Post-Print hal-01701122, HAL.
    2. Hirose, Yasuo & Kamada, Koichiro, 2003. "A New Technique for Simultaneous Estimation of Potential Output and the Phillips Curve," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(2), pages 93-112, August.
    3. Yasuo Hirose & Koichiro Kamada, 2001. "A New Technique for Simultaneous Estimation of the Output Gap and Phillips Curve," Bank of Japan Working Paper Series Research and Statistics D, Bank of Japan.
    4. Lisa Sella & Gianna Vivaldo & Andreas Groth & Michael Ghil, 2016. "Economic Cycles and Their Synchronization: A Comparison of Cyclic Modes in Three European Countries," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 12(1), pages 25-48, September.
    5. Research and Statistics Department, 2003. "The Output Gap and the Potential Growth Rate:Issues and Applications as an Indicator for the Pressure on Price Change," Bank of Japan Research Papers 2003-05-09, Bank of Japan.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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