Further on the Nature of the Australian Business Cycle

Strong and Tan (1991) found Australian output variation was well characterized by a stochastic trend implying output shocks have a permanent effect on the level of activity. The paper finds that in Australia the stochastic trend alternative is statistically dominated when the data are allowed to be characterized by a probabilistic segmented trend specification. This finding implies shocks will only have a permanent effect on output when the series' growth path switches from one growth regime into another as a result of the shock.