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The Great Wars, the Great Crash, and the Unit Root Hypothesis: Some New Evidence About An Old Stylized Fact

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  • Ben-David, Dan
  • Papell, David

Abstract

For decades, the prevailing sentiment among economists was that growth rates remain constant over the long run. Kaldor considered this to be one of the six important `stylized facts' that theory should address, and until the emergence of endogenous growth models, this was a fundamental feature of growth theory. This paper uses an endogenous trend break model to investigate the unit root hypothesis for 16 countries, using annual GDP data spanning up to 130 years. Rejection of the unit root, which is facilitated by the inclusion of a trend break, introduces the possibility of examining the long-run behaviour of growth rates. We find that most countries exhibited fairly steady growth for a period lasting several decades. The termination of this period was usually characterized by a significant and sudden drop in GDP levels. But rather than simply returning to their previous steady-state path, as predicted by the standard neoclassical growth model, most countries continued to grow at roughly double their pre-break rates for many decades, even after their original growth path had been surpassed.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 965.

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Date of creation: Jun 1994
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Handle: RePEc:cpr:ceprdp:965

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Keywords: Economic Growth; Unit Root Hypothesis;

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References

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  1. Lawrence J. Christiano, 1988. "Searching For a Break in GNP," NBER Working Papers 2695, National Bureau of Economic Research, Inc.
  2. David K. Backus & Patrick J. Kehoe, 1991. "International evidence on the historical properties of business cycles," Staff Report 145, Federal Reserve Bank of Minneapolis.
  3. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
  4. Banerjee, Anindya & Lumsdaine, Robin L & Stock, James H, 1992. "Recursive and Sequential Tests of the Unit-Root and Trend-Break Hypotheses: Theory and International Evidence," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 271-87, July.
  5. Lawrence J. Christiano & Martin Eichenbaum, 1990. "Unit roots in real GNP: do we know, and do we care?," Working Paper Series, Macroeconomic Issues 90-2, Federal Reserve Bank of Chicago.
  6. Campbell, J.Y. & Perron, P., 1991. "Pitfalls and Opportunities: What Macroeconomics should know about unit roots," Papers 360, Princeton, Department of Economics - Econometric Research Program.
  7. James G. MacKinnon, 2010. "Critical Values for Cointegration Tests," Working Papers 1227, Queen's University, Department of Economics.
  8. Raj, Baldev, 1992. "International Evidence on Persistence in Output in the Presence of an Episodic Change," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(3), pages 281-93, July-Sept.
  9. Bhargava, Alok, 1990. "An Econometric Analysis of the U.S. Postwar G.N.P," Journal of Population Economics, Springer, vol. 3(2), pages 147-56, August.
  10. Rappoport, Peter & Reichlin, Lucrezia, 1989. "Segmented Trends and Non-stationary Time Series," Economic Journal, Royal Economic Society, vol. 99(395), pages 168-77, Supplemen.
  11. Eric Zivot & Donald W.K. Andrews, 1990. "Further Evidence on the Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Cowles Foundation Discussion Papers 944, Cowles Foundation for Research in Economics, Yale University.
  12. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  13. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
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Cited by:
  1. Michael Bruno & William Easterly, 1995. "Inflation Crises and Long-Run Growth," NBER Working Papers 5209, National Bureau of Economic Research, Inc.
  2. Julio Herrera Revuelta & Jesus Santamaria Fidalgo, 1998. "Testing differences in long run growth among Spanish regions: Can growth models explain it?," ERSA conference papers ersa98p11, European Regional Science Association.
  3. Gil-Alaña, Luis A., 2001. "Unit and fractional roots in the presence of abrupt changes with an application to the Brazilian inflation rate," SFB 373 Discussion Papers 2001,67, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  4. Julio Herrera Revuelta & Jesús Santamaría Fidalgo, 1997. "Las diferencias en la aportación factorial al crecimiento económico de Castilla y León y España," Revista de Estudios Regionales, Universidades Públicas de Andalucía, vol. 3, pages 35-64.
  5. Gil-Alana, L. A. & Robinson, P. M., 1997. "Testing of unit root and other nonstationary hypotheses in macroeconomic time series," Journal of Econometrics, Elsevier, vol. 80(2), pages 241-268, October.
  6. Herrera Revuelta, J. & Santamaría Fidalgo, J., 2000. "La distribución del crecimiento económico en España.1955-1993," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 14, pages 73-94, Abril.
  7. Ben-David, Dan & Papell, David H., 1995. "The great wars, the great crash, and steady state growth: Some new evidence about an old stylized fact," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 453-475, December.
  8. Pritchett, Lant, 1996. "Where has all the education gone?," Policy Research Working Paper Series 1581, The World Bank.
  9. Asmaa Ahmed, 2005. "Random Walks in the Economic Dynamic Series," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 78-100.

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