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The multivariate Beveridge--Nelson decomposition with I(1) and I(2) series

Murasawa, Yasutomo (2015): The multivariate Beveridge--Nelson decomposition with I(1) and I(2) series.

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Abstract

The consumption Euler equation implies that the output growth rate and the real interest rate are of the same order of integration; i.e., if the real interest rate is I(1), then so is the output growth rate and hence log output is I(2). To estimate the natural rates and gaps of macroeconomic variables jointly, this paper develops the multivariate Beveridge--Nelson decomposition with I(1) and I(2) series. The paper applies the method to Japanese data during 1980Q1--2013Q3 to estimate the natural rates and gaps of output, inflation, interest, and unemployment jointly.

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