convergence fail, state space model

[EviewsUser1]

I am estimating a stochastic trend model, which should be straight forward, but I can't get it to converge. Any idea what I did wrong? See attached.

[startz]

Are you estimating an AR(1) plus an AR(2)? I don't think the parameters are identified.

[EviewsUser1]

I thought I was estimating a random walk for the trend component and an ar(2) for the cylce. The model described by equation (2) in the attached.

[startz]

You're right of course. Sorry for the misread. Change the maximum number of iterations to 600 and you should get convergence.

[EviewsUser1]

a different error

[startz]

If you're using EViews 9, switch the optimization method to EViews Legacy. You get one more iteration and the error message goes away. I'm not entirely sure if this means the problem is solved or if it means it's being masked.

Glenn?

[EviewsUser1]

yes, I was wondering that myself, can I trust the estimates? They do not look like the estimates in the Kuttner paper (even considering that I am using data that has been revised several times).

[startz]

Note that your AR(2) component is essentially just a random walk. What is probably happening is "aliasing." The random walk component is being picked up by what's intended to be the cyclical model and the random walk component has zero variance. These kind of models are very susceptible to this.

You might try different starting values, perhaps something close to Kuttner's. Or get the starting values from the univariate ARIMA representations.

This kind of outcome is a well-known pain in the ass. :(