Home > Uncategorized > A Rare Political Post: Unit Root -v- Trend Stationary

A Rare Political Post: Unit Root -v- Trend Stationary

2011 January 20

The conflict between trend-stationary and unit-root is basically about the statistical properties of macro data. Under the unit-root hypothesis, which I thought was well established, I see the attempt to do macroeconometrics as basically hopeless. The way I see it, with a unit root, every change is a structural change. As a result, there is no way to use macroeconomic data from different decades as if they allowed you to conduct a controlled experiment. See my lost history paper.

I am not sure that it is correct to attach economic meaning to the concepts of trend-stationary and unit-root, but it will help a non-technical reader to try to do so. Think of trend-stationary as an economy where the movements in output are driven by transitory factors. Eventually, the economy returns to a path determined by steady growth in capacity.

Think of a unit-root economy as one in which movements in output are driven by permanent factors. The economy does not return to some pre-determined path. Instead, starting from wherever you are, you grow at some average rate. …

Arnold Kling @ Econlog

What’s so political about that? The context of the discussion …

There’s an interesting spat [rb: in Spring 2009] going on among (liberal vs. conservative) academic economists. It began when Bush II’s economic advisor, Greg Mankiw of Harvard, questioned the Obama’s team prediction of faster growth rates in a few years. The Obama budget plan has been criticized by some for relying on rosy growth forecasts in the near future. Since Mankiw’s original post, Krugman and Delong have weighed in siding with the Obama team. More recently, Mankiw challenged Krugman to a friendly wager: Mankiw believes that real GDP in 2013 will NOT be 15.6 percent above real GDP in 2008 as the Obama team predicts.

h/t to Ben Lorica @ The Practical Quant

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  1. DeWitt Payne
    2011 January 21 at 2:32 pm | #1

    I believe it’s political because the different assumptions lead to different estimates of future tax revenue. If your outlook is rosy, you can spend more now because you’ll be able to afford the debt service later. There may also be a hidden corollary in the rosy view that tax increases won’t slow long term growth.

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