Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/150374
Authors: 
Ejrnæs, Mette
Browning, Martin
Year of Publication: 
2014
Citation: 
[Journal:] Quantitative Economics [ISSN:] 1759-7331 [Volume:] 5 [Year:] 2014 [Issue:] 3 [Pages:] 555-581
Abstract: 
We consider the decomposition of shocks to a dynamic process into a persistent and a transitory component. Without additional assumptions (such as zero correlation) the decomposition of shocks into a persistent and transitory component is indeterminate. The assumption that is conventional in the earnings literature is that there is no correlation. The Beveridge–Nelson decomposition that is widely used in time series analysis assumes a perfect correlation. Without restrictions on the correlation, the persistent-transitory decomposition is only set-identified. For reasonable autoregressive moving average (ARMA) parameters the bounds for widely used objects of interest are very wide. We illustrate that these disquieting findings are of considerable practical importance, using a sample of male workers drawn from the Panel Study of Income Dynamics (PSID).
Subjects: 
Earnings process
persistent-transitory shocks
ARMA model
permanent-transitory shocks
Persistent Identifier of the first edition: 
Creative Commons License: 
https://creativecommons.org/licenses/by-nc/3.0/
Document Type: 
Article

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