Michael LoFaso


This paper examines whether output fluctuations are better characterized as shocks with measurable and persistent effects or transitory deviations from macroeconomic growth trends. Building on the work of Nelson and Plosser [1982) and Campbell and Mankiw [1987), the paper employs ARMA and Monte Carlo techniques to provide robust evidence for the persistence of shocks. After accounting for the Great Moderation period of the late 20th century, the models suggest that the magnitude and volatility of impulse responses are comparable, yet slightly smaller than Campbell and Mankiw’s findings. When applied to the economic crisis beginning in 2007, the paper’s findings of persistence suggest that the shock will affect economic growth into the foreseeable future, with output levels remaining below potential capacity well into the next decade.