What Do We Learn from Unit Roots in Macroeconomic Time Series?

Danny Quah

NBER Working Paper No. 2450
Issued in November 1987
NBER Program(s):   EFG

It is often argued that the presence of a unit root in aggregate output implies that there is no "business cycle": the economy does not return to trend following a disturbance. This paper makes this notion precise, but then develops a simple aggregative model where this relation is contradicted. In the model output both has a unit root, and displays repeated short-run fluctuations around a deterministic trend. Some summary statistical evidence is presented that suggests the phenomena described in the paper is not without empirical basis.

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