Shock Persistence in Australian Output and Consumption

Abstract

The distinction between transitory and permanent shocks bears important implications for economic analysis in general, and for forecasting and policy issues in particular. This distinction is at the centre of the debate on which class of models is best suited to represent economic variables: stationary models around a deterministic trend, or stationary models around a stochastic trend. The debate is there focused on the Australian case. It is found that both output and consumption are characterized by stochastic trends, but without transitory component. This corresponds to a measure of persistence equal to one for both variables.