Multivariate Estimates of the Permanent Components of Gnp and Stock Prices*

The economic assumption that a present value relation holds between consumption and income and between stock prices and dividends, or the statistical assumption that the consumption/ income ratio and the dividend/price ratio are stationary imply that the permanent or random walk component in each series of a pair must be the same as the permanent component in the other series of a pair. Either assumption then allows us to estimate the variance of the permanent component of one series (GNP, stock prices) from the variance of the permanent component of the other (consumption, dividends), or from the covariance of the two series’ permanent components. This paper presents such estimates, and finds that the permanent components are about half those estimated by similar univariate methods.