Working Paper: NBER ID: w1916
Authors: John Y. Campbell; N. Gregory Mankiw
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.
Keywords: output fluctuations; business cycle; economic theory; persistence of shocks
JEL Codes: E32; C22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| one percent innovation in real GNP (O39) | change in long-run forecast of GNP by over one percent (E17) |
| one percent innovation in real GNP (O39) | output shocks are largely permanent (E39) |
| output shocks are largely permanent (E39) | challenge traditional understanding of business cycles (E32) |