NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Univariate vs. Multivariate Forecasts of GNP Growth and Stock Returns: Evidence and Implications for the Persistence of Shocks, Detrending Methods

John H. Cochrane

NBER Working Paper No. 3427 (Also Reprint No. r1866)
Issued in September 1990
NBER Program(s):   EFG

Lagged GNP growth rates are poor forecasts of future GNP growth rates in postwar US data, leading to the impression that GNP is nearly a random walk. However, other variables, and especially the lagged consumption/GNP ratio, do forecast long-horizon GNP growth, and show that GNP has temporary components. Labor income and stock prices (using the dividend/price ratio) display the same behavior. This paper documents these facts and examines their implications for the persistence of shocks to GNP and time-variation in expected stock returns. I find that GNP has an almost entirely transitory response to a GNP shock that holds consumption constant. This is intuitive: if consumption does not change, permanent income did not change, so the change in GNP should be transitory. Similarly, a stock price shock that holds dividends constant suggests a discount rate change, and prices display a large transitory movement in response to this shock. The paper also examines implications of transitory variations in GNP and labor income for methods of extracting stochastic trends or "cyclically adjusting" GNP, and for explaining "excess smoothness" violations of the permanent income hypothesis.

download in pdf format
   (535 K)

email paper

This paper is available as PDF (535 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w3427

Published: "Permanent and Transitory Components of GNP and Stock Prices," Quarterly Journal of Economics, pp. 241-265 (February 1994).

Users who downloaded this paper also downloaded these:
King, Plosser, Stock, and Watson w2229 Stochastic Trends and Economic Fluctuations
Cochrane w4698 Shocks
Friedman The Permanent Income Hypothesis
Lo and MacKinlay w2168 Stock Market Prices Do Not Follow Random Walks: Evidence From a Simple Specification Test
Cochrane w16972 Discount Rates
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us