Unit roots, economic fluctuations, and the “persistence” of shocks

The relative importance of different shocks on the level of economic activityhas been a hot subject of research over the last 25 years. The traditional view, retained byKeynesians and Monetarists alike, is that shocks to aggregate demand are the impulses toeconomic fluctuations, a phenomenon independent of growth. A succession of real shocksand 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 andseek to explain economic fluctuations abstracting from monetary considerations. This paperreviews the empirical evidence on the permanence of shocks. Although much can be said forthe interdependence between growth and fluctuations it also concludes, contrary to the RBCview, that economic policy is important in generating an environment conducive to growth. JEL Classification: E13; C50.