Unit roots, random walks and the sources of business cycles: a survey

The issue of dccomposing output fluctuations into permanent (trend) and transitory (cyc1es) components has received much attention in the recent literature. The traditional practice until the early 1980s was to fit a deterministic polynomial trend to the data and interpret the residuais as cyc1es. However, the pathbreaking work of Nelson and Plosser (1982) revealed that such a procedure was not appropriate since real GNP as well as several other macroeconomic variables appears to have an autoregressive unit root, and this implies that this series is integrated (or difference stationary) and hence has a stochastic trend. Nonetheless, once a stochastic trend is allowed myriad possible decompositions can be obtained depending on the process attributed to the trend component. A wide field of research was then opened and many interesting

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