No. 221 - Has the Post-War US Economy Deviated less from the Stable Growth Regime?

This paper examines if the US economy has deviated less from the stable growth regime after World War II compared to the pre- World War I period. The analysis is conducted by decomposing output fluctuations into business cycle fluctuations, that is shifts of the growth path of output, and non-business cycle fluctuations, that is movements along the growth path of output. Since policy makers are concerned with preventing major fluctuations, we statistically examine the shifts of the economy between a stable-growth, a recessionary and an expansionary regime. Using a three-regime Markov representation, we find that the post-war economy displays a longer expected duration for the stable growth regime and it has a lower probability, of remaining in the recessionary or expansionary regime even if it gets there. Using the data set which was used in the past to argue that there was no post-war stabilisation, we conclude that there was indeed business cycle stabilisation in the post-war period.