SHOCK PERSISTENCE AND STOCHASTIC TRENDS IN AUSTRALIAN AGGREGATE OUTPUT AND CONSUMPTION

The distinction between transitory and permanent shocks is at the cent re of the debate on which class of models is best suited to represent economic variables: stationary models around a deterministic trend, or stationary models around a stochastic trend The debate is here focuse d on the Australian case. It is found that both aggregate output and c onsumption are characterized by stochastic trends, but without a trans itory component. This corresponds to a measure of shock persistence eq ual to one for both variables. For the specific case of aggregate outp ut, this result may be interpreted as indicating the absence of busine ss cycles.