2019/08. The multivariate simultaneous unobserved components model and identification via heteroskedasticity
Mengheng Li, University of Technology Sydney and Ivan Mendieta-Muñoz, University of Utah
Date of publication: May 2019
Working paper number: 08
We propose a multivariate simultaneous unobserved components framework to determine the two-sided interactions between structural trend and cycle innovations. We relax the standard assumption in unobserved components models that trends are only driven by permanent shocks and cycles are only driven by transitory shocks by considering the possible spill over effects between structural innovations. The direction of spill over has a structural interpretation, whose identification is achieved via heteroskedasticity. We provide identifiability conditions and develop an efficient Bayesian MCMC procedure for estimation. Empirical implementations for both Okun’s law and the Phillips curve show evidence of significant spill overs between trend and cycle components.