The persistent-transitory representation for earnings processes

Mette Ejrnæs; Martin Browning

doi:10.3982/QE239

The persistent-transitory representation for earnings processes

7 Citationer (Scopus)

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).

Originalsprog	Engelsk
Tidsskrift	Quantitative Economics
Vol/bind	5
Udgave nummer	3
Sider (fra-til)	555–581
Antal sider	27
ISSN	1759-7323
DOI	https://doi.org/10.3982/QE239
Status	Udgivet - 1 nov. 2014

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10.3982/QE239

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title = "The persistent-transitory representation for earnings processes",

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).",

author = "Mette Ejrn{\ae}s and Martin Browning",

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T1 - The persistent-transitory representation for earnings processes

AU - Ejrnæs, Mette

AU - Browning, Martin

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PY - 2014/11/1

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N2 - 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).

AB - 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).

U2 - 10.3982/QE239

DO - 10.3982/QE239

M3 - Journal article

SN - 1759-7323

VL - 5

SP - 555

EP - 581

JO - Quantitative Economics

JF - Quantitative Economics

IS - 3

ER -

The persistent-transitory representation for earnings processes

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