a b s t r a c t
We present a new approach to trend/cycle decomposition of time series that follow regime-
switching processes. The proposed approach, which we label the ``regime-dependent steady-state''
(RDSS) decomposition, is motivated as the appropriate generalization of the Beveridge and Nelson
decomposition [Beveridge, S., Nelson, C.R., 1981. A new approach to decomposition of economic time
series into permanent and transitory components with particular attention to measurement of the
business cycle. Journal of Monetary Economics 7, 151174] to the setting where the reduced-form
dynamics of a given series can be captured by a regime-switching forecasting model. For processes in
which the underlying trend component follows a random walk with possibly regime-switching drift, the
RDSS decomposition is optimal in a minimum mean-squared-error sense and is more broadly applicable
than directly employing an Unobserved Components model.