Is it One Break or Ongoing Permanent Shocks That Explains U.S. Real GDP?

33 Pages Posted: 29 Jun 2013

See all articles by Sui Luo

Sui Luo

University of Washington - Economics

Richard Startz

UCSB

Date Written: May 2013

Abstract

The relative importance of permanent (trend) versus cyclical shocks to GDP has been a central issue in macroeconomics, since the work of Nelson and Plosser (1982) and Morley et al. (2003) found large trend shocks. In contrast, Perron and Wada (2009) argued for a one time change in the mean growth rate in 1973 to be the only trend shock to the postwar U.S. real output. We re-estimate the Perron and Wada (2009) model conditional on a trend break having occurred at any one quarter. We then average the conditional estimates of the trend variance over the probability that the break occurred in a specified quarter. We do this both by an approximate Bayesian model average, in which the conditional estimates are done by maximum likelihood, and the date probabilities are found using the Schwarz (1978) approximation to the Bayesian marginal likelihood, and an exact Bayesian analysis which incorporates break date uncertainty into a trend-cycle decomposition of U.S. real GDP. The weight of the evidence supports the Perron and Wada (2009)’s finding of a fairly small trend variance, but the data does not provide very strong evidence against the alternative.

Keywords: GDP, trend break, difference stationary, trend stationary

JEL Classification: C11, E30

Suggested Citation

Luo, Sui and Startz, Richard, Is it One Break or Ongoing Permanent Shocks That Explains U.S. Real GDP? (May 2013). Available at SSRN: https://ssrn.com/abstract=2286822 or http://dx.doi.org/10.2139/ssrn.2286822

Sui Luo

University of Washington - Economics ( email )

Seattle, WA
United States

Richard Startz (Contact Author)

UCSB ( email )

Department of Economics
University of California
Santa Barbara, CA 93106-9210
United States
805-893-2895 (Phone)

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