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The Review of Economics and Statistics 2025

The Dynamic Persistence of Economic Shocks

Jozef Baruník1; Lukáš Vácha2

1 Institute of Economic Studies, Charles University, Opletalova 26, 110 00, Prague, Czech Republic; and The Czech Academy of Sciences, Institute of Information Theory and Automation Pod Vodarenskou Vezi 4, 182 00, Prague, Czech Republic · 2 The Czech Academy of Sciences, Institute of Information Theory and Automation Pod Vodarenskou Vezi 4, 182 00, Prague, Czech Republic; and Institute of Economic Studies, Charles University, Opletalova 26, 110 00, Prague, Czech Republic

Abstract

We propose a novel framework for modeling time-varying persistence in economic time series, allowing for smoothly evolving heterogeneity in shock dynamics. We leverage localized regression techniques to flexibly identify changes in persistence over time, offering a data-driven alternative to traditional parametric models. We applied this methodology to U.S. inflation and stock market volatility data and found substantial persistence variations that align with key macroeconomic events and market conditions. The results reveal previously undetected pockets of predictability and provide significant increases in out-of-sample forecast accuracy. These findings have important implications for economic modeling, forecasting, and policy analysis.

DOI
10.1162/rest.a.270
Pages
1-45
Language
en
Sources
openalex crossref

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