In my previous post I presented a couple of very different five year old “predictions”. That got me thinking, given what came to pass, about the “unit root” hypothesis on RGDP spawned by the influential 1982 paper by Nelson and Plosser: “TRENDS AND RANDOM WALKS IN MACROECONOMIC TIME SERIES – Some Evidence and Implications”, where the abstract reads:
This paper investigates whether macroeconomic time series are better characterized as stationary fluctuations around a deterministic or as non-stationary processes that have no tendency to return to a deterministic path. Using long historical time series for the U.S. we are unable to reject the hypothesis that these series are non-stationary stochastic processes with no tendency to return to a trend. Based on these findings and an unobserved components model for output that decomposes fluctuations into a secular or growth component and a cyclical component we infer that shocks to the former, which we associate with real disturbances, contribute substantially to the variation in observed output. We conclude that macroeconomic models that focus on monetary disturbances as a source of purely transitory fluctuations may never be successful in explaining a large fraction of output variation and that stochastic variation due to real factors is an essential element of any model of macroeconomic fluctuations.
Subsequent research showed that the hypothesis was ‘heroic’, at least for US real output. The picture that comes out of the chart below seems consistent with RGDP being ‘trend-stationary’, a case in which fluctuations are transitory. The “potential” (mean) growth for the whole period (1870 – 2012) is 3.4%.
The next chart shows the same thing based on quarterly post war data. The mean growth is also 3.4%.The “Great Moderation” is visible, being characterized by real output remaining very close to trend for more than 20 years.
The point of this post is to wonder if the monetary policy adopted by the Fed after 2007, in reaction to a real shock (oil prices) at the same time that the financial system was ‘wounded’ by the house price crash, has caused a break in the time series of US RGDP. This comes from noticing that more than 6 years since the recession began RGDP shows no “intention” of climbing back to its ‘centenary trend’.
Notice from the first chart above that in the fourth year following the start of the “Great Depression” RGDP changed course (‘instigated’ by Roosevelt´s monetary expansion).
The ‘break’ view is reflected in the “new normal” that many people talk about.
Will it be the case that in 50 years’ time economics students will be shown the “Bernanke Break”?