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

John Cochrane

No 3427, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

Date: 1990-09
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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

Downloads: (external link)
http://www.nber.org/papers/w3427.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:3427

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w3427

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().