A dominant characteristic of economic data is their tendency to trend over time. This behavior includes the wandering nature of interest rates, exchange rates, and inflation with their long and erratic cycles, as well as the secular drift of series like GDP. Important socioeconomic issues such as national economic growth, the determinants of growth, and disparities in growth across nations all relate to matters of trend. Much of modern time series econometrics, as well as recent work on panel data, is concerned with the statistical analysis of such trend behavior, including the possible interconnectedness of the trends across different series. Economic theory provides insights about potential sources of trend and linkages but it gives little practical guidance concerning suitable formulations for empirical research.
This research will model trends in economic data in such situations and develop a theory of statistical inference that allows for incorrect specification of the trends in applied work. The project will develop a formal apparatus for studying commonly fitted trend functions and develop methods for validly interpreting these fitted trends within the context of a coordinate system that is designed to capture trends and long cyclical behavior in the data under a much more general maintained hypothesis. Using coordinate functions, it is possible to analyze trends in a single series and co-movement in several series while placing only weak restrictions on the class of generating mechanisms. The research will develop new econometric methods for this approach and explore their relationship to conventional methods developed for cases where the true generating process is known.
The research will involve an asymptotic theory for inference and for trend forecasting, simulation experiments to evaluate performance characteristics of the methods, and empirical applications with both macro-economic and financial data sets. The methods will contribute to our understanding of wider socioeconomic issues related to economic growth and they will be used to assess empirical evidence on the hypothesis that the world economy diverges during a period of transition before it starts to converge. Thus, the results of this research will allow social scientists and statistician to model and correctly analyze data whose trends had hitherto been poorly understood.
