The estimation uncertainty of permanent-transitory decompositions in cointegrated systems

Published in "Econometric Reviews", 2019, vol. 38, issue 3, pp. 279-300; see http://dx.doi.org/10.1080/07474938.2016.1235257.

Keywords: transitory components, VECM, delta method, bootstrap

Download: manuscript version August 2016 . The methods proposed in this paper can be applied with my function package "PTconf" for gretl. These are available (from within the gretl program) on gretl's function package server, or see this listing.

Abstract: The topic of this paper is the estimation uncertainty of the Stock-Watson and Gonzalo-Granger permanent-transitory decompositions in the framework of the cointegrated vector-autoregression. Specifically, we suggest an approach to construct the confidence interval of the transitory component in a given period (e.g. the latest observation) by conditioning on the observed data in that period. To calculate asymptotically valid confidence intervals we use the delta method and two bootstrap variants. As an illustration we analyze the uncertainty of (US) output gap estimates in a system of output, consumption, and investment.

(Latest update: September 2019)