The Uncertain Trend in U.S. GDP

Abstract

Several recent papers conclude that U.S. real GDP is trend stationary, implying that all shocks are transitory and the long run path is deterministic. These inferences fail to take into account two problems: the distortion of test size in finite samples due to data-based model selection and the fragility of unit root tests in the face of plausible departures from the maintained hypothesis of temporal homogeneity. Indeed, additive outliers that alter the level of output for only one period reliably trigger false rejections of the unit root hypothesis when it is true and signal the presence of permanent shifts in trend that did not occur. Trend stationarity is not supported by the more homogeneous post-war data and if imposed would imply business cycles of implausible duration and pattern--the economy was 8% below the trend line in 1994.

JEL Classification: C22, E32