TRANSITORY VARIATION IN INVESTMENT AND OUTPUT

Although the permanent-income model is a cornerstone of macroeconomics, the evidence for its assumption that output has a transitory component is mixed. This paper documents transitory variation in GNP. The story centers on the variation in investment, relative to consumption. Consumption behaves like a random walk. In the long term, investment moves one-for-one with consumption. In the near term, however, investment takes strong transitory swings away from the random walk it shares with consumption. These surges in investment, relative to consumption, are not offset by Government Expenditures. Transitory variation in investment thus becomes transitory variation in GNP.