Permanent and Transitory Shocks to the U.S. Economy: Has Their Importance Been Constant over Time?

Abstract

The main purpose of this paper is to scrutinize the time-varying relative importance of the permanent and the transitory shocks to the U.S. real GDP. After accounting for the cointegration relation between real GDP, consumption, and investment, we find that i) the real permanent shock played a more prominent role than the nominal transitory shock from the 1950s to the 1960s, but the two shocks have almost equally contributed to the stochastic movements of real GDP since the 1970s; (ii) the long-run growth of the U.S. economy has substantially slowed since the recession in 2001. The annualized growth rate of real GDP has declined to approximately 1.6 %, falling from a peak of nearly 3.3 % in the last decade. For the empirical analysis, we employ a multivariate unobserved component model that accommodates stochastic volatility. The multivativariate model is estimated by an efficient particle Gibbs sampler with particle rejuvenation that simultaneously draws latent state variables all at once.

Keywords: Structural Break, Long-run Growth, Unobserved Component Model, Trend-cycle Decomposition, Particle Gibbs Sampling, Particle Rejuvenation

JEL Classification: C11, C52, E32