Are Output Fluctuations Transitory?

John Campbell · N. Gregory Mankiw

168 citations0/0 files storedNational Bureau of Economic Research

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Monetary Policy and Economic Impact Economic Theory and Policy Unemployment and Economic Growth

Abstract

According to the conventional view of the business cycle, fluctuations in output represent temporary deviations from trend.The purpose of this paper is to question this conventional view.If fluctuations in output are dominated by temporary deviations from the natural rate of output, then an unexpected change in output today should not substantially change one's forecast of output in, say, ten or twenty years.Our examination of quarterly post-war United States data leads us to be skeptical about this implication.We find that a unexpected change in real GNP of one percent should change one's forecast by over one percent over a long horizon.While it is obviously imprudent to make definitive judgments regarding theories on the basis of one stylized fact alone, we believe that the great persistence of output shocks documented in this paper is an important and often neglected feature of the data that should more widely be used for evaluating theories of economic fluctuations.

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References

1982Time to Build and Aggregate Fluctuations 1973Some International Evidence on Output-Inflation Tradeoffs.1977Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule 1977Understanding business cycles 1986Univariate detrending methods with stochastic trends 1986Life-Cycle Models of Consumption: Is the Evidence Consistent with the Theory?1985Trends, random walks, and tests of the permanent income hypothesis 1991Time to build and aggregate fluctuations

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