detrending data

[indrani_5]

I have a general question. Should data be detrended before using it for VAR analysis?

[TomDoan]

Not usually. Certainly not a linear trend, since the VAR (if it includes a CONSTANT) will pick that up just fine. If, however, you're using the VAR as an alternative to some type of dynamic model which doesn't easily handle trends (a DSGE for instance), then it's common to do something like an HP detrending. Depending upon what you're doing, you might want to look at per capita measures to eliminate the part of a trend due to population growth.