Is There a Trend Break in U.S. GNP? A Macroeconomic Perspective

Posted: 19 Aug 2008

See all articles by Lutz Kilian

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics; Centre for Economic Policy Research (CEPR)

Lee E. Ohanian

University of California, Los Angeles (UCLA) - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: January 1998

Abstract

Unit root tests against trend break alternatives are based on the premise that the dating of the trend breaks coincides with major economic events with permanent effects on economic activity, such as wars and depressions. Standard economic theory, however, suggests that these events have large transitory, rather than permanent, effects on economic activity. Conventional unit root tests against trend break alternatives based on linear ARIMA models do not capture these transitory effects and can result in severely distorted inference. We quantify the size distortions for a simple model in which the effects of wars and depressions can reasonably be interpreted as transitory. Monte Carlo simulations show that in moderate samples, the widely used Zivot-Andrews (1992) test mistakes transitory dynamics for trend breaks with high probability. We conclude that these tests should be used only if there are no plausible economic explanations for apparent trend breaks in the data.

Keywords: Unit Roots, Trend-Breaks, Transitory Shocks

JEL Classification: C22, C15, E32

Suggested Citation

Kilian, Lutz and Ohanian, Lee E., Is There a Trend Break in U.S. GNP? A Macroeconomic Perspective (January 1998). Available at SSRN: https://ssrn.com/abstract=1228540

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-764-2320 (Phone)
734-764-2769 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Lee E. Ohanian

University of California, Los Angeles (UCLA) - Department of Economics ( email )

Box 951477
8283 Bunch Hall
Los Angeles, CA 90095-1477
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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