The HUMP-Shaped Behavior of Macroeconomic Fluctuations

We analyze the nature of persistence in macroeconomic fluctuations. The current view is that shocks to macroeconomic variables (in particular real GNP) have effects that endure over an indefinite horizon. This conclusion is drawn from the presence of a unit root in the univariate time series representation. Following Perron (1989), we challenge this assessment arguing that most macroeconomic variables are better construed as stationary fluctuations around a breaking trend function. The trend function is linear in time except for a sudden change in its intercept in 1929 (The Great Crash) and a change in slope after 1973 (following the oil price shock). Using a measure of persistence suggested by Cochrane (1988) we find that shocks have small permanent effects, if any. To analyze the effects of shocks at finite horizon, we select a member of the ARMA(p, q) class applied to the appropriately detrended series. For the majority of the variables analyzed the implied weights of the moving-average representation have the once familiar humped shape.