Separating trend from cycle is central to the study of long-run growth and the business cycle. The goal is to measure the permanent and transitory components of output to identify its long-run and business cycle fluctuations. The seminal work of Burns and Mitchell (1946, Measuring Business Cycles, NBER, New York) focused on dating the peaks and troughs of the business cycle rather than decomposing observable data into the underlying permanent and transitory series. A weakness of the Burns and Mitchell method is that it cannot distinguish a transitory recession from a lower long-run growth. For example, some argue that the inability of economists and policymakers to distinguish a productivity slowdown from a steep but temporary recession was the source of the inflation of the 1970s. Thus, being able to measure transitory business cycle fluctuations separately from the long-run growth path of the economy should be a useful tool for policymakers who need to make decisions in real time.
Beveridge and Nelson (1981) developed A New Approach to Decomposition of Economic Time Series into Measurement of the “Business Cycle,” an econometric model that decomposes a time series into its permanent and transitory components. Much business cycle analysis of the last twenty-five years would not be possible without their decomposition. A leading example is King, Plosser, Stock, and Watson (“Stochastic Trends and Economic Fluctuations,” American Economics Review 81, no. 4: 819–40). They show that the permanent component of the Beveridge and Nelson decomposition of output can be interpreted as total factor productivity in a Solow growth model. Since King, Plosser, Stock, and Watson, an open question for students of the business cycle has been the sources and causes of the transitory component of output.
Tim Cogley (Department of Economics, University of California, Davis), Steven Durlauf (Department of Economics, University of Wisconsin, Madison), and James Nason (Federal Reserve Bank of Atlanta) are organizing a conference in honor of the twenty-fifth anniversary of the publication of Beveridge and Nelson (1981) and Charles Nelson’s other contributions to economics and econometrics to be held at the Federal Reserve Bank of Atlanta Friday, March 31, and Saturday, April 1, 2006. The conference should provide new monetary theories and models that engage the Beveridge and Nelson decomposition to generate restricted trend-cycle decompositions of macro aggregates. Such research will connect the Beveridge and Nelson decomposition in its role as a business cycle measurement tool to monetary business cycle theories. We also expect the conference to include papers that cover the diverse range of topics on which Charles Nelson has worked during his career. These papers include forecasting (broadly construed) of macro and financial time series, weak instruments, and models of regime switching. The impact of Charles Nelson’s work on these topics is reflected in the fourteen papers by leading researchers in North America and Europe that will be presented at the conference.