xvi Editors’ Introduction
appealing turn of phrase, Pollock refers to obtaining a decomposition of compo-
nents based on the periodogram “where components often reside within strictly
limited frequency bands which are separated by dead spaces where the spectral
ordinates are virtually zeros.” The existence of these “spectral dead spaces” is key
to a practical decomposition of an economic time series, however achieved. In
practice, trend fitting requires judgment and a clear sense of what it is that the
trend is capturing. Other critical issues covered in this chapter include the impor-
tance of structural breaks, a topic that has been influential elsewhere (for example,
in questioning the results of unit root testing: Perron, 1989); and to aid the reader,
practical examples are included throughout the exposition.
Chapter 7, by Joe Cardinale and Larry Taylor, continues the time series theme of
analyzing economic cycles whilst focusing on asymmetries, persistence and syn-
chronization. This is a particularly timely and somewhat prophetic chapter given
that we are currently experiencing what is perhaps the deepest recession in recent
economic history. How can we analyze the critical question “When will it end?”
This chapter provides the analytical and econometric framework to answer such a
question. The central point is that cycles are much more interesting than just mark-
ing their peaks and troughs would suggest. Whilst “marking time” is important, it
is just the first part of the analysis, and should itself be subjected to methods for dis-
tinguishing phases (for example, expansions and contractions of the output cycle).
Once phases have been distinguished, their duration and characteristics become
of interest; for example, do long expansions have a greater chance of ending than
short expansions? Critical to the analysis is the hazard function: “the conditional
probability that a phase will terminate in periodt, given that it haslastedtor more
periods.” Cardinale and Taylor consider different models and methods of estimat-
ing the hazard function and testing hypotheses related to particular versions of it.
They also consider tests of duration dependence, the amplitudes of cycles, and the
synchronization of cycles for different but related variables; for example, output
and unemployment. Their theoretical analysis is complemented with a detailed
consideration of US unemployment.
No handbook of econometrics could be without a contribution indicating the
importance of cointegration analysis for non-stationary data. In Chapter 8, Kate-
rina Juselius considers one of the most enduring puzzles in empirical economics,
namely, if purchasing power parity (PPP) is the underlying equilibrium state that
determines the relationship between real exchange rates, why is there “pronounced
persistence” away from this equilibrium state? This has been a common finding of
empirical studies using data from a wide range of countries and different sample
periods. Juselius shows how a careful analysis can uncover important structures in
the data; however, these structures are only revealed by taking into account the
different empirical orders of integration of the component variables, the identifi-
cation of stationary relationships between non-stationary variables, the dynamic
adjustment of the system to disequilibrium states, the appropriate deterministic
components, and the statistical properties of the model. As Juselius notes, and
in contrast to common approaches, the order of integration is regarded here as
an empirical approximation rather than a structural parameter. This opens up a