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The Permanent Component of GNP and Consumption: Results from an Univariate Analysis for Switzerland

  • Economics
  • Mathematics


The Permanent Component of GNP and Consumption: Results from an Univariate Analysis for Switzerland PETER KUGLER* 1. INTRODUCTION Traditional empirical studies of macroeconomic fluctuations did not spend a lot of time tojnodel the permanent or trend component of macroeconomic time series. The Keyne- sian analysis of the 60's as well as the neoclassical studies of the 70's proceeded on the assumption that the long run behavior of macroeconomic variables can be modeled as deterministic trend functions, which were to reflect the smoothly changing supply conditions. Thus, macroeconomic fluctuations were mainly understood as transitory responses of the economy to demand disturbances. At the beginning of the 80's, this view was challenged. On an empirical level, the very influential paper of NELSON and PLOSSER (1982) argued that the trend behavior of most macroeconomic time series is adequately represented by stochastic and not deterministic trends. This implies that the effect of shocks on the level of macroeconomic variables is to a certain extent permanent and not purely transitory as in the deterministic trend case. Moreover, NELSON and PLOSSER claim that a substantial proportion of the fluctuations of US GNP growth is accounted for by permanent shocks.1 This finding was considered as empirical support for the concept of real business cycles models as formulated by KYDLAND and PRESCOTT (1982) and LONG and PLOSSER (1983), which model economic fluctuations as equilibrium responses of the economy to real shocks. The NELSON/PLOSSER paper triggered-off a lot of subsequent research which tried to establish the importance of the permanent or persistent component of the US GNP fluctuations [i.e. WATSON (1986), CAMPBELL/MANKIW (1987a, b), COCHRANE (1988)]. These studies, however, do not unambiguously support the NELSON/PLOSSER findings. Most recently, the relevance of the results of the work cited above was questioned. The papers of CHRISTIANO and EICHENBAUM (1989) and LIP

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