Quantitative Economics
Journal Of The Econometric Society
Edited by: Stéphane Bonhomme • Print ISSN: 1759-7323 • Online ISSN: 1759-7331
Quantitative Economics: Nov, 2014, Volume 5, Issue 3
The persistent–transitory representation for earnings processes
Mette Ejrnæs, Martin Browning
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).
Keywords. Earnings process, persistent-transitory shocks, ARMA model, permanent-
transitory shocks.
JEL classification. C23, D31, J31.
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).
Keywords. Earnings process, persistent-transitory shocks, ARMA model, permanent-
transitory shocks.
JEL classification. C23, D31, J31.
Full Content: Print
Supplemental Material
Supplement to "The persistent–transitory representation for earnings processes"
Journal News
March 5, 2024
Announcing the New Journal Editors
The terms of the Editors of the Econometric Society's three journals end June 30, 2025. We are pleased to announce the incoming Editors and to thank the outgoing Editors for their excellent and continuing service.
Econometrica: Since 2019, Guido Imbens has served as the 14th Editor of Econometrica. On July 1, 2025, Marina Halac will become the Editor.
Quantitative Economics: Stéphane Bonhomme has been the Editor of Quantitative Economics since 2021. His successor will be Bernard Salanié.
Theoretical Economics: The Editor of Theoretical Economics since 2021 has been Simon Board. Taking over for him in July 2025 will be Federico Echenique.
Guido, Stéphane, and Simon have been outstanding Editors. We are grateful to them for the work they have done and will continue to do, and we look forward to further congratulating them next year. We believe Marina, Bernard, and Federico will be outstanding successors and we thank them in advance for their service.
Finally, we are grateful to Larry Samuelson for chairing all three search committees, and we thank the search committee members for their hard and fruitful work:
Econometrica: Christian Dustmann, Lars Hansen, Alessandro Lizzeri, George Mailath, Ariel Pakes, Helene Rey, and Elie Tamer.
QE: Kate Ho, Michael Keane, Felix Kubler, Whitney Newey, and Frank Schorfheide.
TE: Jeff Ely, Johannes Horner, Gilat Levy, Meg Meyer, and Ran Spiegler.
