A Structural Break in U.S. GDP?

26 Pages Posted: 13 Aug 2003

See all articles by David N. DeJong

David N. DeJong

University of Pittsburgh - Department of Economics

Roman Liesenfeld

University of Cologne, Department of Economics

Jean-Francois Richard

University of Pittsburgh - Department of Economics

Date Written: July 2003

Abstract

The volatility of growth in U.S. real GDP declined dramatically in the mid-1980s. Viewed through the lens of linear autoregressive models, this phenomenon appears to be the result of a structural break in the innovation process that drives GDP fluctuations. We present an alternative model that is structurally stable over the entire post-war period. This model characterizes growth as following non-linear trajectories that fluctuate stochastically between alternative periods of general acceleration and deceleration. The specific trajectories can differ across regimes due to randomness in the parameters that govern their behavior; but the underlying distribution from which these parameters are realized is stable. The model also allows the variance of growth-rates innovations to differ across regimes, as a function of their corresponding regime-specific trajectories. We find no evidence of a structural break when viewing GDP growth through the lens of this model. Moreover, using an encompassing exercise, we show that this model can account for the evidence favoring a structural-break interpretation of the volatility reduction under linear autoregressive processes. The model also encompasses general patterns of business-cycle activity.

Keywords: business cycles, encompassing, regime switching, error correction, conditional heteroscedasticity

JEL Classification: C22, C51, C52

Suggested Citation

Dejong, David N. and Liesenfeld, Roman and Richard, Jean-Francois, A Structural Break in U.S. GDP? (July 2003). Available at SSRN: https://ssrn.com/abstract=428664 or http://dx.doi.org/10.2139/ssrn.428664

David N. Dejong (Contact Author)

University of Pittsburgh - Department of Economics ( email )

4A21 Forbes Quad
Pittsburgh, PA 15260
United States
(412) 648-2242 (Phone)

Roman Liesenfeld

University of Cologne, Department of Economics ( email )

Albertus-Magnus-Platz
D-50931 Köln
Germany

Jean-Francois Richard

University of Pittsburgh - Department of Economics ( email )

4901 Wesley Posvar Hall
230 South Bouquet Street
Pittsburgh, PA 15260
United States
412-648-1750 (Phone)

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