# A THEORY OF THE PSEUDOSPECTRUM AND ITS APPLICATION TO NONSTATIONARY DYNAMIC ECONOMETRIC MODELS Michio Hatanaka and Mitsuo Suzuki

* Econometric Research Program Research Memorandum No. 52 January 31, 1963

*

The authors are grateful to C. W. J. Granger for his many helpful comments on an earlier draft of this paper. However, any remaining errors are the authors'. The work presented in the present paper was initiated by J. W. Tukey's suggestion that the best way to understand the "spectrum" of the nonstationary process is to look upon it as some sort of average of changing spectra in J. W. Tukey, "Discussion, Emphasizing the conne,ction between Analysis of Variance and Spectral Analysis," Technometrics, Vol. 3, No.2, 1961, p. 203. The authors wish to acknowledge the support given by the National Science Foundation and the Rockefeller Foundation respectively.

Princeton University Econometric Research Program 92-A Nassau Street Princeton, N.J.

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I
II III

The Purpose and Conclusions Pseudospectrum

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The Pseudospectral Matrix of the Stochastic Processes with Changing Amplitudes and Changing Phases Econometric Matrix of the Explosive Dynamic Model

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IV The Pseudospectral
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Pseudospectral Matrix of the Deviation from the Equilibrium Solution in the Dynamic Model with Changing Parameters Pseudospectrum of a Constant and a Trend

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VI

spectral analysis has been used for the study of the stochastic process which is very unlikely to be stationary. however.I. B. Tukey. W. that the first two moments of the stochastic process do not depend upon the origin of time. In practice.. 1961. The Measurement of Power Spectra. Blackman and Tukey (1) developed a method for making estimations of the spectrum of the stationary stochastic process by uSing samples of finite length. In mathematical analaysis the spectrum has been defined for the stochastic process which has an infinitely long time domain and satisfies the stationarity conditions in the wide sense: E(X ) = a constant t The stationarity conditions mean. E. Blackman and J. i." Technometrics. THE PURPOSE AND CONCLUSIONS OF THIS PAPER The spectrum is a parameter of a stochastic process indicating its variance decomposition by frequencies. As a first step toward filling the gap between the mathematical analysis and the practical applications. among other things. May. samples of finite length have been used for the study of variance decomposition of the stochastic process which may not satisfy the stationarity conditions.e.Parzen. . On the other hand. ~. E. the process is essentially IIhistorylessll in the sense in which history is used in the social sciences. the practical applications of spectral analysis can be justified if the stochastic process is indeed stationary. Parzen has also made an important contribution. Thus. 'Mathematical Considerations in the Estimation of Spectra. in the Eractical applications of spectral analysis.

If the stationarity conditions hold. In the present paper we have defined the pseudospectrum and the crosspseudospectrum for those processes which are not necessarily stationary and which We shall show first that the basic charac- are defined over a finite time domain. teristics of spectrum as defined in the usual mathematical analyses are maintained for our definition of pseudospectrum and cross-pseudospectrum.g. the estimate from samples of finite length cannot be considered a representation of the "spectrum". following: By this we mean the The pseudospectrum is the freQuency decomposition of the mean of the 2Although we can apply any transformations to a given time series with the purpose of eliminating nonstationarity. behavioral. the "spectrum" during the second half of the 19th century would be different from the lispectrum71 during the first half of the 20th century. the estimate of the spectrum from samples of finite length can be considered as a kind of representation of the spectrum of the process having an infinitely long time domain. e. it is difficult to ascertain whether or not the series comes from a stationary stochastic process after the transformation. If the stationarity conditions do not hold.. The institutional. . The only way to get around this difficulty is to recognize explicitly the historical nature of the economic stochastic process and to define the "spectrum" as a characteristic of the (nonstationary) process over a finite time domain~ In other words.-2- Particularly in economic applications we cannot assume that the stationarity conditions hold. therefore. assuming that the "spectrum" of such a process would be meaningful. we must recognize that the "spectzrum"would depend upon what finite portion of the time domain is taken. there is no reason to believe that the first two moments of the economic stochastic process do not depend upon the origin of time~2) Under these conditions the finite length of the data has an entirely different implication than under the stationarity conditions. as long as the "spectrum" is a characteristic of the process over the entire time domain from 00 to -I- 00. and technological backgrounds of economic time series are always changing and.

) First. regardless of the data given to them they "read outn some outputs. Further. deterministic function of time and dtX t xt If dt is a is a stationary stochastic process so that is a nonstationary stochastic process whose variance changes with time in . and. In the present paper we study the nature of the pseudospectrum The nature of assuming that these vague observations and hypotheses are acceptable. the mathematical expectations of the estimates of spectra and cross-spectra which we would obtain if we had made this estimation without considering the problems of nonstationarity. (The electronic is identical to computers do not know whether the data come from a stationary stochastic process. just as the spectrum is the freq_uency decomposition of the (constant) variance. then the pseudospectrum the spectrum. some observations and fairly reasonable hypotheses have been . The apparent variances of many economic time series for the United States show a secular change usually with a clear discontinuity about World War II.presented to characterize vaguely the nonstationarity of the economic stochastic process. spectrum and pseudospectra just as it does for the cross-spectrum and spectra. the pseudospectrum then obtained can be used for the interpretation of the estimates of spectra and cross-spectra without considering the problems of nonstationarity. if the stochastic process is defined over an infinitely long time domain and if the stationarity conditions do hold.-3- time-changing variance. we study the stochastic process in which the variance changes over time. apart from the complications due to the spectral window. (The nature of the pseudospectrum derived from a too exact assumption as to the nonstationarity would not be useful because economics has not reached the stage in which an exact statement can be made as to the nonstationarity. It is important to note that pseudospectrum and cross-pseudospectrum are.) Although the exact specification of the types of nonstationarity is not possible at the present stage of economics. just as (or cross-covariance) and the spectrum (or cross-spectrum) The coherence ineq_uality holds for the cross-pseudo- the (constant) autocovariance is a Fourier transform pair. and the pseudospectrum The mean of the time-changing autocovariance (or cross-covariance) (or cross-pseudospecrrum) is a Fourier transform pair.

Further. we proceed to the study of the stochastic process in which the amplitudes and the phases of different frequencies change with time. but its meaning is straightfoT'irlard. instantaneous spectra.v ) over t and at frequency aging over v is the double average of Iv I. If the phase changes are uniform over all different frequencies. t for frequency and the phase of t +v (1) for frequency Then the phase of the cross-pseudospectrum cp(1) (t. over only a narrow frequency interval.) is either a smooth function of time or involves one or two jumps in addition to a smooth trend so that the pseudospectrum of d t is concentrated in the very low frequencies. where the averv is done with weights that are roughly in inverse proportion to Third.Let erence between the phase of Y (2) at time t cp(1) (t. we can show that it is related to the spectral matrix of the random disturbance and the pseudospectral matrix of the exogenous variable. that the amplitudes of the seasonal variations of many economic time series have a downward trend and also that the phases of the seasonal variations change from year to year. to the time series generated As for the pseudospectral matrix of the endogenous variable in an explosive dynamic econometric model with constant parameters. where P x ((1)) is the spectrum of Xt' Second. t the cross-pseudospectrum. and if the phase changes are either smooth or involve one or two jumps in addition to a smooth trend.proportion to pseudospectrum of d t then the pseudospectrum of and the spectrum of Thus) if d t is the convolution of the (A similar formula also holds for x. the pseudospectrum of dtX t is roughly equal to the mean of the time-changing. for example. in the same way as . we apply the concept of the pseudospectrum by the nonstationary dynamic econometric models. the phases of the cyclical components are very likely to be affected 'I'he convolution theorem that is similar to the one by external events such as wars. then the phase of the cross-pseudospectrum between two such processes Yt(2) shows the average of the time-changing If the phase changes are uniform is more differences between the phases of the two processes. the phase of the cross-pseudospectrum complicated. We know. mentioned above holds in this case too.v) represent the diff(1) at time (1).

g. which deviation is used to represent business fluctuations.. Finally. as for the case of dominated by some irregular cycles. the pseudospectral matrix has a more complex form than an average of the time-changing. instantaneous spectra. The transfer function is independent of matrix of the deviation is t = B . However. For the case in which the parameters of the model change over time..•. of the model are not constant.-5- the spectral matrix of the endogenous variable in a stable dynamic econometric model is related to the spectral matrix of the random disturbance.. we study the stochastic process of the deviation from the eQuilibrium solution of the model.. a given time point the periods prior to time let t.m) . the pseudospectrum of the result of smoothing the spectrum of x+ can be expressed as m. dtxt if dt is For example. t For let us consider the impacts of the random disturbances in (and including t) upon the values of the deviation at t-j.t~l at freQuency Ct . where * is the spectral matrix If the parameters of the random disturbance and means the Hermitian conjugate. and can be written as PU(m) The spectral G(m) PU(m) G(W)*. we can show that the pseudospectral matrix of the deviation is a convolution which involves the spectral matrix of the random disturbance and a transfer function of the parameters. G(t. = Ct . * sin EV PU(m) G(t+v.J o 1 B. Bj. and then shifting it along the axis of . a double average of and v. There are many possible cases in which such an interpretation is not dtx t mentioned above.0' Ct. Ct.. available. m. = . So far we have mentioned the cases in which the pseudospectrum is directly amenable to a reasonable interpretation without the use of some specific a priori knowledge (e. Ct 1 .. be the impact of the random disturbance in period .0 If the parameters of the model are constant..m) be the transfer function of Ct ..j G(m). and.. Ct.l' . Let t. even in the case in which the parameters are smooth functions of time and the spectrum of the random disturbance is smooth.m) v G(m) PU(m) G(m)* over t under the same smoothness conditions. the exact time function representing the changes in the parameters) about nonstationarity. the pseudospectral matrix of the deviation is 1"'" l1N t [~G(t.

. If the pseudospectra of the time series of the (changing) parameters are not concentrated in the very low fre~uencies. Thus the contribution of the present paper to economic applications of spectral analysis lies in the convolution theorem which holds for a broad class of nonstationary economic stochastic processes and which enables us to discern the cases in which a reasonable interpretation of the spectral matrix is available without the use of some specific a priori knowledge about nonstationarity from the cases in which such an interpretation is not possible. the interpretation of the spectral matrix is very difficult. basically the same convolution theorem holds for any types of changes of the parameters. For the other models of nonstationarity treated above.-6- This follows from the convolution theorem which holds for any movements of and from the fact that the pseudospectrum of d t d t is not concentrated in the very low fre~uencies around zero but rather spreads around a certain non-zero fre~uency. although the relevant parameters vary from one model to another as described above.

N f F (rn-ru' ) L: d v )e-iru'vdru' 2:n: -:n: v=-2N 2N L: where F(rn-ru'N) j (_hl_ v=-2N -i(rn-ru' v ) 1-2N+l ) e and lim F(ru)ru'jN) is a Delta function of N~oo 2N = .N 1 2N 2:n: 1 L: (1- _bL 2N+l v=-2N -iruv r (v )e' :n: 2N . PSEUDOSPECTRUM . to the more commonly used definition 00 v =_00 e-ivru (v ) r where dv) = E (XtX +v) t lim N~oo lim N~oo lim N~oo . the variance of the process The power spectrum is the decomposition ru. N~oo v=-2N e -ivru ( ) rv . This is because 1 E{ L: .AND CROSS-PSEUDOSPECTRUM One definition of the power spectrum (density) for a stationary stochastic process with zero mean is f x (ru) = lim 1 E N~oo 2:n:(2N+l) -:n: co < :n: < (1) where ru is the (angular)frequency.s::.iru( s )} txtxs e 2:n:(2N+l) '--N_:St.-7II. (1) is equivalent in terms of frequency of the spectrum.1 1 '2rt am L: rn-ru'. and x t is the discrete time series data of produced by the stochastic process.

subtracted in (2). is defined as (2) where is considered.-8- Let us consider a general (stationary or nonstationary) (Xt} stochastic process and suppose that the data are available for a finite time period.~ to ~ is the mean of the variance (about zero) over the given period.f x 2~N 1 f -~ ~ E{ N 00Jt 2 } 1 It~l xtedill '- I =-2~N 1 f -~ N N !: !: N t=l s=l E ( . (a) The integral of p (ill) over the frequencies from x .S) d xtxs e ill (3) = N 1 t=l !: E {I xt I } v of a general process 2 (b) xt Let us define the pseudoautocovariance as N-v :E rev) for lag rev) =-N-v 1 E t=l (XtXt+v } for v>O rev) = N-Ivl 1 N !: t=lvl+l E (XtXt+v} for v<0 . we find it For the purpose of our mathematical convenient to work with the pseudospectrum This is why the mean is not for the variance about zero rather than the mean.. as a complex number... treatment. N. ~ P (ill)dill =~ -~ . . 2. in general.. The pseudospectrum P (ill) X t=l.) -iill(t..

. 1 - 1. e -1 N ~ -}. £.) v = 0. + (N-l) (4) J -r( p x (m)eiOJVdm for Proof: 1 N-l N-v -I: I: E x x \. r(v) Then the pseudospectrum p x (m) and the pseudoautocois weighted by are a Fourier transform pair when N-l I: r(v) x and 1 (m) = 2TC v=-(N-l) (1 - hl r(v ) e-lOJV .}.1 x (m) and r(v) are a Fourier transform pair without using .. •. :. i 1..-9- Obviously variance t . 't+v t [ v=O t=l f .. P r(v) = r(-v). .e .-lOJV -lmV +" " XX e t t+v v=.. =~ 2r( N~l V=. Then p the weight..(N-:U I (1 _ 1.1) n -r( r (v )e -iOJV r( J p -r( x (m)e lmV dm • 1 .(N-l ) t -_I vi +1 £..: 2n: J VI N-l I: =- (N-l) (1 - ~) N (I) rye im(vl-v)d co = (1 - hl) r(v) ' N E 3Alternatively r(v) N-v ~ t=l N I: I: {xtxt+v} for t+V v>0 r(v) E {XtX } for v < 0 t=~vl +1 may be used..

. Pd(ill) of a deterministic process as d t pseudospectrum We can now define the pseudospectrum in the given time period t = 1.) E v=.. in general. If a nonstationary process As Bartlett pointed out.(N-l) (Nv) )e- iillV = PX(ill). is totally irrelevant to t the pseudospectrum of nonstationary process. N 1 =-- 2rcN N Ed e-1(l)v . a complex number.. h~ever. point. converges to the spectrum.. This. (d) the If is stationary with zero mean and the time period is infinite in length... and p (ill)respectively as x ?(v) = 1 N-v N. + 12 t=l t where dt is considered. .· The pseudospectrum is defined for and dependent upon a given finite length of time period covering a specific portion of our economic historyj thus the consistency of the estimate p (ill) is not a x relevant problem. . 't+v N xx t=1vi +1 t 't+v I: v >0 ?(v) = 1 N-Ivl v<0 and Px (ill) N-l I: A( V=. the variance of p (ill) is not reduced to zero when N ~ 00 even if x is stationary. as can be seen from (l) and (2).(N-l) r v e iillV ) - the mathematical expectation of px (ill) N-l I: is E(p (ill)) x (1 - hl .-10- (c) The pseudospectrum p (ill) is the mathematical expectation of sample estimates x of spectra (4)obtained by using When we define the sample estimates of r(v) as the lag window for the estimation. v I: x x t t=l .

xt = Then 01 0 0 . and The cross-pseudospectrum between two stochastic is and the cross-pseudocovariance is r12(v) 1 == -- N-v 2: N-v 1 E f t=l x t ' (1) (2) Xt+v } v >0 r12 (v ) = N"-1 I v ~ E t=1vi +1 {x (1)" t (2)} 't+v . For the multi-variate stochastic process we can define the cross-pseudospectrum and pseudocovariance. stochastic process with zero mean.~ r12(v) are a Fourier transform pair when r 12 (v) The cross-pseudospectrum between two deterministic functions of time. v <0 • (e) The cross~pseudospectrum P12(W) and the cross-pseudocovariance is weighted by 1 . processes. and ~t' is defined as 1 ~ ~A U At 2:n:N ts U tjJ· e -iw(t-s) s In general. let vector process. be a m-variate stochastic . is significant only at the low This will be elaborated on later in Section VI. the pseudospectrum of sum of the pseudospectra of and Especially when dt it is well known that the pseudospectrum of fre~uencies.-11- Yt = d t + x ' where t d t is a deterministic process and xt Y t is a stationary is obviously the is a trend.

) J (f) The coherence inequality holds for the pseudospectra and cross-pseudospectrum. The matrix of pseudospectral and cross-pseudospectral functions. This representation will be used extensively in Sections ( .. i. and R(-v) = RTVJ .e. the Hermitian conjugate IV and V.(r») J and be the Fourier transform of -imt x t and f.iCDV jk Another representation of t~e matrix P(m) is p(m) --E 1 .-12- is the pseudocovariance matrix. the pseudospectral matrix. is defined as where r ( v ) e. (co) J ~ x Je t=l t N ( .) fk(m) = N t=l ~x (k) -imt t e Then from the Schwartz's inequality..2rcN { ~ ~ X X*e-im(t-s) ts ts l J 7 where and X* s are the vectors of' m components and where X* s is defined as the complex conjugate of the transpose of of X s X s . Let f .Le. the inequality .

(co) . .-13- holds.e . Pkk(m) • This is the coherence ine~uality. Then i.. I P 'k(m) J I 2 = P JJ < ..

y (o) = [p (co) ] YjYk where p YjYk (ill) = .III. serves as the mathematical background for Sections IV and V.ATRI.. (a) The pseudospectral matrix of the stochastic process in which the amplitudes It also change uniformly over different fre~~encies but the phases do not change.J ill+:n: ill-:n: p XjXk (ill-illi) P djdk (ill' )dro' (6) Px x (ill)and x (k ) t .m st· processes an d .x: F THE STOCHASTIC O AND CHANGING PHASES PROCESS WITH CHANGING AMPLITUDES The present section deals with the stochastic process in which either the amplitudes or the phases of different fre~uencies change over time. Theorem 1. lC xt (j)(. 2J ••• N". has the pseudospectral matrix tP. ..and jk are respectively the cross-spectrum between PdJ. (M) xt (M) 1.'" M)" oe d et ernn. 1 J=. Let dt (j)(. 1 . M) J= stationary stochastic processes with stochastic process Then a column vector of the Yt Yt (1)- d (1) (1) t • xt d t . THE PSEUDOSPECTRAL IYf. The nonstationary stochastic process in which the amplitudes change uniformly over different fre~uencies but the phases do not change can be represented by the product of some function of time and some stationary stochastic process. (M) Yt .dk(ill) d (j) and d (k) the cross-pseudospectrum between t t x (j) and t ..

E] .K (ml)p . The pseudospectrum of spectrum of dt(j) Y (j) t x (j) t = dt(j)X (j) t is the convolution of the pseudo~ and the spectrum of xt (j). lS aWl h' t e nOlse.(m) J d (j) [-e. d (j) t (ii ) Suppose that the pseudospectrum (for the variance about zero) of is significant only in the frequency band small number.where E>0 is a certain (This is possible when d (j) is either a very smooth function of t The fact that t involves one or two jumps in addition to the trend. J. ( L) If by using the pseudospectrum of . Et' with its variance y t (J .d.s ) n = f p -n x . is a pseudospectrum for the variance about zero is important in judging the . p Yj (m) is the mean of the changing.e.. i.i. yt(j) = dt(j)E .. = 2nN 1 L: L: d (j)"d (k ) E { ts t s xt (j)- Xs (k)} e .dk J q. then the pseudospectrum of t p (j) is (co) = Yj cl 2n ~Idt (j)12 N This means that . xt ( j ).e..e.-15Proof. instantaneous spectra of 2n elld t (j)12 overtime.•.im(t.x.(m-m')dml d. time or Pd. i. a sort of weighted moving d (j) as the t 2 average of the spectrum of weights.e.

) Further assume that p x.(zo) dm } J J :n: =2 o f :n: (cos OJt)u.. pseudospectrum of the spectrum of sample of y (j) t d (j)x (j) t t and then shifting it along the axis of is available and when no a priori information about Yt (j) there would be no easy way to interpret the pseudospectrum of . J (m) +E -E 0 f p dj (ml )dru' :n: ~p x. stationary stochastic process with continuous spectrum can be represented as ( . m 0 + E) • Then p y. j=l. •.(m)-iv. M J 0 .-16- plausibility of the concentration of this spectrum in the low freQuencies in economic studies. J (co)= p x. (b) The pseudospectral matrix of the stochastic process where the phases change uniformly over different freQuencies but the amplitudes do not change.. the can be expressed as the result of smoothing m.m' ~p x. J (m) 0 for all m' s in (m0 E. (iii) If the movements of y (j)= t xt dt(j) are dominated by irregular cycles. (m) J 0 This is again the mean of the changing spectra. J (m) 0 ~p x. (m)dm. J (ro.(m)dm + 2 J f (sin mt)v. When only one dt is given. Any real.) 0 -:n: f p dj (ml )d. (m) is smooth so that J p x.) J x :n: -:n: t f e imt [u .

(ill)U. v>O U ~ 0.-17- where u .the principal n + the principal 2 n .) The phase of (7) is defined ~o be more precise. take the principal n .(ill) u .(-ill).(ill)V. (ill)V. I ill E( uj (ill)~(ill' )) if if if ill illY =1= ill ill' = ill =1= ill I ill' if ill= (R e [] and I m [] mean respectively as (5) the real part and the imaginary part of [ ]. .(ill) = -v . (-ill) J J) E(U. = JJ V.(ill')) = E(V.(illi))_ { J J J J - if 0 -. v<O U ::: v < 0 0. lp (ill) if 2 X. ill ill' =1= ill ill =i J E(u. v>0 U ~ 0.the principal value value value value of of of of v U v U v U v U if if if if U 2: 0.ill')) ( J J = 0 for all ill.

J J J J 11 +2 J o sin rot [sin cp.(m) is an odd function of m..(m) + Cpj m J () . J J (zo) and of which the phase of frequency cp. If cp. (co)u .(co) cos cp.(m)u. (co) J u. (co) . (ro) )dm • J J J J Actually (8) is a real process.(m) . (m)v . (m)v. then such a process is represented by J (8) 11 =2 J a cos mt [cos cp.(m)v. can be represented . as do not change. The nonstationary.sin cp. J at the tan.(m). where the phases change with time. (m)u.sin cp. but the amplitudes real stochastic processes.(co) ]dm . because m. (m) . J J J J xt(j)(cpj(m)) is identical to the spectrum of xt(j) because • is greater than the phase of frequency m because sin cp.(m) J J J J J J J J == X t (j) by cp (to) . (co) J =- m is greater than that of X t (j) cp.(m)u. (m)u. even function of The spectrum of cos cp. (m) + cos cp.(m) + cos cp. (m)v . (m)v.sin cp. (-m). (m) + cos cp. stationary process of which the spectrum is identical to by p X. (co) is an J J J J and sin cp.(m)v.-18- We are concerned with a real.1 t an - 1 v . (m)u.

(m)]dm . M) defined (9) and (lO) have the cross-pseudospectrum pYjYk(m) =f m+1L m p XjXk (ro-co P::: ~ (co )dml I) I CPjCPk (11) + p (m)m' ) p (ml )dm' CPjCPk Xj~ (J)-1L m f and are the cross-pseudospectra. The nonstationary stochqstic processes by of Yt (j) and Yt (k) M.(m)]dm J J J J 1L +2 f sin rot [sin cP rt (m)u. respectively. Corollary (j=l. the case where the phases change uniformly over different frequencies.e.sin cp.(m) . J J J J o In the present section (b). (co) + cos cp.-19- 2 f o cos rot[cos cp. k=l. •.. .t(m)u. we shall study the special case of Y (j) ' t for O<m<rr o m=O (10) 1L<m<O i.t(m)v. .•• 1..t (m)v .

(mY )dm' + J p )~ ((J... 6]. and p j are smooth. m +rc] o 0 m::: m 0 is not signi- ficant.mi. W 0 + 6) 0 Then. if rc> m> - 0 6.(m) ~j~k 6.d.. 6] and 6 p (co) CPj~k (k) are relatively significant This where y (j) t >0 is a certain small number.)-m Y )dm l ~j~k + rc Jp 0 Xj~ (ml )p ~j~k (().m' (m' )dmi )p m XjXk ~j~k m-rc XjXk ~j~k • q. otherwise is smooth so that Further assume that xx k (m) PX· x (m) :::x x (mo) P j for all mIs in (m k j k o - 6. because the interval does not include the frequency band [ . (m' ).iv.).)-m' ' )dm ::: J . Yt is possible when the phase changes of involve one or two jumps.CD+rc m p ((J..). . or.((). Since y t (") J n o J im't Iu . Suppose that the norms of only in the frequency band [- ~. then the first integral of (11) for [ill . (m') J J Therefore.e. Therefore.-20- Proof...6. }dm'. ::: J o p -rc XjXk (m! )~ .

. then the second integral of (11) for m = m 0 is not signi- ficant and. let us consider a special case where Y (j) t and xt(j) ~ xt(k) is solely involves t Then.CPkt) (m o tan =2:--co-s~(~CP-j-t----CP-k~t~) t < . and yt(k). we ootain € Pyjyk(mo) ~ Pxjxk(mo)_[ ~j~k(ml)dmi (12' ) Thus. 12 (12) If . the phase difference oetween yt(j) in (9) involves yt(k) due to the fact that e-iCPkt(m) • Indeed.€) • (13 I) In order to understand the meaning of the phase of the cross-pseudospectrum oetween for all Yt(j) tIS.~ <m - 0 <- € . the phase of the cross-pseudospectrum oetween from the phase of the cross-spectrum oetween t y (j) t and y (k) t differs x (j) and x (k) oy t (co > €) o or -1 t 2: sin(cpjt .. e-iCPjt(m) whereas Y (k) t (cpjt-CPkt) is the instantaneous phase difference at .

inG s l 2 cosG + cosG2 l (c) The pseudospectral matrix of the stochastic process where 'bot. the phase of the cross-pseudospectrum instantaneous phase difference. where bot.n the amplitudes and the phases change differently over different frequencies.(co) iv . . Therefore.-22y (k) oetween y (j) tat' nd When x (j) t = x (k) t' p XjXk (ru) 0 in (12) or (121) is real. and. can oe generated from a real stationary stochastic process xt oy (J) :::: TC J -TC TC :::: eiwt (u . the phase of PYjYk(ruo) is given oy (13) and (13'). two angles is a kind of average (over time) of the (13) or (13') shows that the average of any 61 and g2 must 'be defined as tan -1 sinG -:.(co) )dru J J Y (j) t -TC J eimtdt (j)(co)u .(co) iv . The real nonstationary stochastic process.(ru) ( )dru J J (14) where ) d (j)(ru) :::: a (ru e-iCP·t(ru) J jt t ajt(ill) represents the amplitude of the frequency the phase difference of the frequency ru oetween ru at time x (j) t t .h the amp li tudes and phases change differently over different frequencies. and CPjt(ru) y (j) t and at time t. Yt (j).

ill')1is significant jk that are near or equal to ill'.2rcN L: L: f (j)(ill')f(k)(ill')e-iill(t-s) t ..ill') 1 - k .) Pf f (ill. which means (for any ill') so that only for the values and (ii) that p Xj~ (ill') is smooth so that for any ill' such that ill € < ill' < ill + 0=0 € .s ts and f (k) (ill') d (k )(ill' iill's = )e s s (The proof is omitted.ill')s the cross-pseudospectrum i at freQuency jk ministic processes d (j)(ill')eiill't and d (k)(ill')eiill's • t s Suppose (i) that d (j) (ill') and t t ill between the deter- d (k) (ill') are smooth functions of time of ill IPf f (ill. t The cross-pseudospectrum and between the real nonstationary as stochastic y (j) defined by (14) can be represented n P YJ'Yk (ill) J P -rc x j xk (ill')p f j fk (ill.-23- Corollary processes 2.)dill' ill wliere Pf r j (ill.

U - cPk (ru) . sin dt-s) t-s is In the special case in which the amplitude does not change at any frequency (16) becomes sin €(t-s) t-s sin dt-s) t-s Let v = t-s and (t v) .t(ru )ak (ro )sin(cp. 0 o \. if we can assume..) cP 'k' -J J ru . in addition to (i) and (ii). that (iii) } for any ru' in ( ru. s0 Then (16') l'S a douole .CPks(ruo)} sin €(t-s) ts J 0 s0 J 0 t-s (16) (16) is a generalization of (13) and (13').t(ru) J 0 S 0 J 0 CPks(ruo)} sin dt-s) ~~ t-s __ ~ L: a.-24- Then from (15) we ootain Further.t(ru )ak (ru )cos(cp.€. ru +€) o 0 then The phase of differs from the phase of the tan -1 t s L: L: a.t(ru) .cP 't (". Notice that inversely related to It-sl where € is small.

-25- average of CP'k J . over t and v .v) Sln€V . where the averaging over v is done with the weights v .ill o (t.

125-139.. THE PSEUDOSPECTRAL MATRIX OF THE EXPLOSIVE DYNAMIC ECONOMErRIC MODEL Most of dynamic econometric models are sets of linear difference equations such as . (1953) pp.. "The analysis of multiple stationary time series. parameters. -1 TIt is related to . Bo' Bl. If the exogenous variables are removed from (17) and the stability condition holds. (17) represents a stationary stochastic process of the endogenous variable TIt' It is well known (6) that the spectral matrix of . ! _l .. P v (ill) by + B e-lillp) p P (co) (B +Ble-iru + v 0 + Be) p -lillp *-1 ." Journal of the Royal Statistical Society (B) 15.. 1St . and ... . P. (18) "Whittle..IV. IB I o B p k x k matrices of the f 0 is assumed. exogenous variables and random disturbances.l ! (k) L i1 represent respectively the endogenous variables... Vt = i '(k) vt L. + rqSt-q + Vt where TIt TIt (k) TIt (1) J St St (1) (1)\ v i t ! ~ .

(17) are. if we take a finite time period. N ~ (ii) that E(V ) = 0. let us assume (i) that the end effects for St are negligible for the period. we can prove that the matrix of ~t V pseudospectral is related to the pseudospectral t just in the same way as ~ matrix of St and the spectral matrix of P (ro) P (ru)is related to v in (18) . where p~(ru) .. (17). ps(ru) and Vt • pv(ru) are respectively thepseudospectral matrices of ~t ' St . ~t represents an explosive stochastic In this case..p (ru) ~ . Vt p time lag of time lag of t=l.and Proof. . t and St is deterministic and is stationary with (iii) that IBo Then +Be -iru + -:rr <ru<:rr. . process.. In the system ~t and for q Theorem 2. .-27- If the stabili ty condition does not hold. The Fourier transforms of the left and right hand sides of respectively.

/v" elms (B +lJe-lm + + .. respectively. :n:] . llk.. for example..d.~ N.. We can get the theorem. .. N .. if the end effect for N L> = " B e -imk -im(t-k) k 'Tlt_ke t=l The pseudospectral matrices of both sides of (1'7)are.e..-28- and + . ... q_. • k time lag is negligibleJ This is because. + B e-lm ) " 'Tlte 'Tl p t=l s=L sol D L> L> . +B e .imp)* and (I'0+f le-im + + r e -iLlXl)* q_ + P (co) • v Since for co in [- :n:.. p .imp)*} p +B p e-iOJp) p (m)(B +Ble-im + 'Tl 0 +B e p .

f . Samuelson: Foundations of Economic Analysis Harvard University Press. let us change the form of the system from (17) to a solvable form. we def'lne th e new varlabl es as fo 11 ows: T)t U = t ! l o BO-lr o~t + Bo-lr l~t-l + o + B -lr ~t o q_-q (18) o . . 'lpaul A. (1947) Mathematical Appendix B.. can be replaced by a system of . . PSEUDOSPECTRAL MATRIX OF THE DEVIATION FROM THE EQUILIBRIUM SOLUTION IN THE DYNAMIC MODEL WITH CHANGING PARAMETERS In econometric studies of business fluctuations the deviation of the solu- tion of (17) from its equilibrium solution are frequently used to represent business fluctuations. We shall consider this deviation in the dynamic econo- metric model whose parameters change over time. To treat the model with changing parameters..-29- V.. ~B -~ o p- 1 ·-B -~ o P O o o o o o where Ik is a kxk identity matrix and B is a kp x kp matrix.l . "'1 varlau es Any linear difference equation of order p p p first order difference equations in en .

(Bty 0 + I: BmZ . (t -s ) = 2nN 1 t s mn W """" ww w Bm [In -n P u ("" )eim' (t-m-s+n).' lm I m (21) H((l)-ml . ) t -m rn=o = I: BTIU t-m m=o This is a moving average of random disturbances pseudospectral matrix of Xt' 1 N I: t--l s=1 N I: U' t Then we can get the PX(m) =- 2nN E t-l s-l I: I: Bm(U m=o n=o t-m '* U s-n )Bn e -lm *.ml )e-i((l)-ml)t (22) t=l . i.e.-30- The system (17) can now be represented by Let us consider the model with constant parameters by using the representation (19) in order to clarify the concepts that we use in this section..ml) _ ~ G(t.j".. t-l t-l X t == Y t .] UJ UUJ Bn'*e-i(l)(t-s) • Put G(t.ml) == I: Bmem=o t-l . The solution of (19) with Y o as the initial condition is (20) Let X t be the deviation from the equilibrium solution.

the initial the time domain extends from time point t =0 to + 00.ru') dru' .. since t 00 X t is now stationary. G(t. * ="2nN 1 ru+n ~n J H(ru'. and (23).-31- We shall call H(~ru'.ru') the douole transfer function of the parameters BO.ru') = L m=o Bme -lru m = G(ru') • This is the transfer function of the coefficients of U's • 2) H((I)-ru' .ru') =0 except of CJ. let us assume 00 to zero when t=- -7 and that.). ••• .~ru' )pu((I)-ru' )H(ru' . (22).ru' such that ~rul = 0 . Then we ootain = 2nN 1 n -n or Px(ru) J H(ru-ru'ru') Pu (ru') H (~ru' . Bt-l. 3) Further (23) oecomes 00 PX(ru) = (L m=o Bme -iCllll) PU(ru) ( (24) = * G(ru) PU(ru) G(ru) ) of a multi-variaole moving which is a well known formula of the spectral matrix average process.ru-ru')dru' • * In order to understand that {Bm} converges the meaning m 00 of (21). and accordingly is carried oack to t =- Then 1) 00 • .ru') is a Delta function H(~ru' . . Bl.

we can regard G(t. = Now let us consider the dynamic econometric model with the parameters changing over time.. t.-32- Going back to the general case where the above assumptions need not hold. m-m' .m zt-m ) t-l L: m=o ct. The system (19) should be replaced by Let .m Ut-m (26) where at m=o c . m') at for a given G(t. If is a smooth function of time IH(m-m'. t-l .m • "Bt -m ' at m=L.m') evaluated is as the transfer function of t.B t-2 . Ut and the .m') as the instantaneous transfer function at B t of the moving average with the weights H(m-m'. . " B 0 We can also regard G(t.BY o0 Then the deviation from the eq_uilibrium solution with condition is t-l L: m=o Y o as the initial Xt=Y t -Cy + t ct.m') m' t-l . ••• . mi)12 significant only in the neighborhood around (l)-m' 0 . Then we can get the pseudospectral matrix of the deviation from the eq_uilibrium solution as a convolution of the spectrum of the random disturbance double transfer function of the parameters.

The pseudospectra1 matrix PX{m) of Xt .. in (26) is.m') dm' f.m') dm' * Ii' N (m'.m... * 'l...(1)-m') t-1 L: m=o C () e -i (1)-m'm t. The pseudospectral e'luiliorium solution matrix of the deviation of of ~t in PX(m) (17) from its • can oe ootained as a portion . .m'-m) - L: G (t.....m Proof.. ..m')Pu(m') 2~N -~ t ~ 1 j L: G (s..(1)-m')e-im't t=l .m -m s-n s.e.-33- Theorem 3.. .d.l)-m')(t-s)dm' s = 2~N _~ H ((1)-m' )PU(m' )H((1)-m' ...m' ..te-i((. G (t.. N t-l s-l * * -im () t-s L: L: L: L: Ct Ut U C e t=l s=l m=o n=o .n N PX' (m ) = 2~N E 1 = __!_ L: G(t.m' )P H ((1)-m' where U ((1)-m')H ((1)-m' ..

. The meaning of for G.m) .. . If (i) PU(m') is smooth so that for some small number €>0 where 1m -m' o I < €.2 ' •. 1m -mil > € . The transfer function is G(m) and the If the paramters of the model are not constant. Hand (27) are now obvious from the explanation given Furthermore. and (23).j t-j).m) is a slowly changing function of time so that II A.... H .)-m'· " m")* .. we can derive the pseudospectal matrices of the following case.o Ct. 012 .l •.1 = B spectral matrix is G(m)PU(m)G(m) * • Ct . The transfer function of is the impact of the random disturbance Ct. then we obtain (28) The above procedure can be summarized as follows. (ii) G(t. f()J. Ct. G. If the parameters of the model are constant.m]) for any t and m 1m -mil < €.Ct.o = B Ct .. o and (iii) G(t..o' t) upon the values of X at time t.m' ) G(t.l ' Ct. the pseudospectral matrix is 1 J1N sin€v v ..t_l at f requency m in period is G(t.. These impacts can be represented Ct. For a given time point t.t_l (Ct. .-34.2 = B . Ct. t let us consider the impacts of the random disturbances in the periods prior to (including by Ct.::(j)lml) is negligible when such that o • H((J.

particularly when t and s• Bt has a trend. i.m can be very different from Bt m . . just as in the case of the cyclically changing variance discussed in Section III. This is because Ct. then the interpretation of the pseudospectrum is difficult. and also because (28) has a double summation over If the cyclical changes rather than the constants or trends dominate the changes of the parameters of the dynamic econometric model..-35- It should be noted that the pseudospectral matrix of the deviation can not be considered the mean of the time changing instantaneous spectra.e.

Pc n(m) N-l L: . This diminishes the significance of the following presentation to some extent. and Pt n(m) 2 . Furthermore. In the present section we investigate how narrow the oand really is.AND A TREND of a In the previous sections we have mentioned that the pseudospectra constant and a trend are significant only in the narrow frequency oand around zero.n rc = a m . the.n (m)dm = a J Pt -rc . respectively.n (m)dm = a (N-l)6(2N-l) We have studied the range of a oetween 9010 and 9910 and the range of N . of a trend depends upon where the origin of time is.n (m)dm = a J p (m)dm -rc c. as Pc n(m) =-2rcN . Thus we merely try to present a clue which might oe useful for forming some idea as to the pseudospectra Let us define of constant and trend. 1 te t::::o -imt 2 Let us define m -{J) m o for each preassigned value of rc a in such a way that JO o p c.f0 o p -m t. Since the pseudoSpectrum it is difficult to present results that have significant generality. pseudospectrum spectra of a and of ot a + ot is not generally equal to the sum of the pseudo- unless the origin of time is centered over the time span. 1 e' -Irut t=o N-l L: Pt n(m) =-2rcN .VI • PSEUDOSPECTRUM OF A CONSTANT .

time element is discrete in the pseudospectrum.n In vie~ of equations (6). However.-37- between 200 and 1.?ll N ·9 .000. . Table 2.n 2:rr N as the unit of frequency. a ill o depends upon N • This relation N for a given is almost an inverse proportion within the Therefore. and in view of the fact that the pseudospectrum of non- is the due average of all sample estimates of the spectrum (apart from the complications If we were treating continuous time.3 12-15 Table 1.the relation is slightly more complicated. we can use ill and 0 regions of a and N which we studied. It might be interesting to note that PtJm(ill) near zero frequency has a violent movement.n (ill )dill by subtracting -:rr f o Pt . this relation should be exactly an inverse proportion. p c.2.n (ill)dm + from f Pt (ill)dill ill .n o :n: :rr f Pt (ill)dm. (8) For Table 2 for Pt n(ill) does not have the same degree of exactness as Table 1. -:rr . a 9010 9510 9910 a 9010 9510 9910 .1 10. (15) and (27) for the pseudospectra stationary processes. ill:y. . and we had to estimate the integral -ill -m f Pt o . a As for (ill). between ill and o When a is fixed.6 N app.2 ill91:rr 1. (11). and s in Table 1.the relation between N for any given is so nearly an inverse proportion that we have presented fairly exact figures Pt n (ill).

that Table 2 represents the nature of the pseudospectra trend in general. When Let us suppose. then 95% of the variance of the frequency interval having the width data. III. If 2n x -2m 1 6 x ]f .where 2n is equal to 2n 6 x 1f ' i. represented in the equations ent of the parameter changes. V are linear dt or a(t. an interesting question is how wide the unit of the frequency interval should be in order to make this average of sample estimates independe~t in the parameters of the stochastic process.ro') is contained in N is the number of then the pseudospectra independ- functions of time.. (6).-38- to the spectral window) obtained with no regard to the problem of stationarity.ro') in Sec. of the slow changes Obviously the small numerical study summarized in the above two tables is not sufficient to give an answer to this question for the general class of slow movements of parameters. the unit of frequency interval is in Sec. (11) (15) and (27) become practically . however. and G(t. Then we can answer the above question. N = 12m.e. of the linear m represents the number of lags used in the estimation of the spectrum.