Unit roots, economic fluctuations, and the “persistence” of shocks
The relative importance of different shocks on the level of economic activity
has been a hot subject of research over the last 25 years. The traditional view, retained by
Keynesians and Monetarists alike, is that shocks to aggregate demand are the impulses to
economic fluctuations, a phenomenon independent of growth. A succession of real shocks
and technological transformations gave rise to what is known as Real Business Cycle Theory.
Proponents of real business cycles do not consider growth separately from fluctuations and
seek to explain economic fluctuations abstracting from monetary considerations. This paper
reviews the empirical evidence on the permanence of shocks. Although much can be said for
the interdependence between growth and fluctuations it also concludes, contrary to the RBC
view, that economic policy is important in generating an environment conducive to growth.
JEL Classification: E13; C50.
Keywords: Real business-cycle theory unit roots economic growth