On trend extraction models: Interpretation, empirical evidence and forecasting performance

This paper deals with the economic interpretation of the unobserved components model in the light of the apparent problem posed by previous work in that several practiced methodologies seem to lead to very different models of certain economic variables. A detailed empirical analysis is carried out to show how the failure in obtaining quasi‐orthogonal components can seriously bias the interpretation of some decomposition procedures. Finally, the forecasting performance (in both the short and long run) of these decomposition models is analyzed in comparison with other alternatives.