Interpolation and Prewar-Postwar Output Volatility and Shock-Persistence Debate: A Closer Look and New Results

Hashem Dezhbakhsh and Daniel Levy

MPRA Paper from University Library of Munich, Germany

Abstract: It is well established that the U.S. prewar output was more volatile and less shock persistent than the postwar output. This is often attributed to the data interpolation employed to construct the prewar series. Our analytical results, however, indicate that commonly used linear interpolation has the opposite effect on shock persistence and volatility of a series—it increases shock persistence and reduces volatility. The surprising implication of this finding is that the actual differences between the volatility and shock persistence of the prewar and postwar output series are likely greater than the existing literature recognizes, and interpolation has dampened rather than magnified this difference. Consequently, the view that postwar output was more stable than prewar output because of the effectiveness of the postwar stabilization policies and institutional changes has considerable merit. Our results hold for parsimonious stationary and nonstationary time series commonly used to model macroeconomic time series.

Keywords: Business Cycles; Output Volatility; Shock Persistence; Prewar and Postwar US Time Series; Linear Interpolation; Variance Ratio; Stationary Series; Nonstationary Series; Periodic Non-stationarity; Missing Observations; Macroeconomic Stabilization; Economic Policy (search for similar items in EconPapers)
JEL-codes: C02 C18 C22 C82 E01 E32 N10 (search for similar items in EconPapers)
Date: 2026-02-10
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Related works:
Working Paper: Interpolation and Prewar-Postwar Output Volatility and Shock-Persistence Debate: A Closer Look and New Results (2026)
Working Paper: Interpolation and Prewar-Postwar Output Volatility and Shock-Persistence Debate: A Closer Look and New Results (2026)
Working Paper: Interpolation and Prewar-Postwar Output Volatility and Shock-Persistence Debate: A Closer Look and New Results (2026)
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