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

38 Pages Posted: 2 Nov 2016 Last revised: 22 Apr 2017

See all articles by Jaeho Kim

Jaeho Kim

University of Oklahoma

Sora Chon

Korea Development Institute (KDI)

Date Written: January 18, 2017

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

Suggested Citation

Kim, Jaeho and Chon, Sora, Permanent and Transitory Shocks to the U.S. Economy: Has Their Importance Been Constant over Time? (January 18, 2017). Available at SSRN: https://ssrn.com/abstract=2862265 or http://dx.doi.org/10.2139/ssrn.2862265

Jaeho Kim (Contact Author)

University of Oklahoma ( email )

729 Elm Avenue
Norman, OK 73019-2103
United States

Sora Chon

Korea Development Institute (KDI) ( email )

263 Namsejong-ro
Sejong-si 30149
Korea, Republic of (South Korea)

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