The Great Depression and Output Persistance

The persistence of shocks to aggregate output has been the subject of continuing investigation since Nelson and Plosser (1982) suggested they are largely permanent. Recent literature reaches mixed conclusions, largely due to disagreement about how to treat the Great Depression. We estimate output persistence based on a parametric bootstrap of a Markov-switching model for GDP 1870Ð1994 in which the economy can switch in and out of a turbulent state. Our results suggest that real shocks persist indefinitely if we drop the maintained assumption of homoskedasticity in favor of a Markov-switching representation of the Great Depression.