Interpolation and Prewar-Postwar Output Volatility and Shock-Persistence Debate: A Closer Look and New Results

2026-02-11

AI Summary

This study investigates whether differences in output volatility and shock persistence between the prewar and postwar U.S. economies have been distorted by data interpolation methods. Through analytical derivations and simulations using both stationary and nonstationary time series models, the paper demonstrates that commonly employed linear interpolation systematically attenuates measured volatility and artificially inflates the persistence of shocks. Consequently, this methodological artifact leads to a substantial underestimation of the true decline in macroeconomic instability from the prewar to the postwar period. The findings indicate that interpolation effects have obscured the genuine stabilizing impact of postwar institutional and policy reforms, suggesting that the improvement in economic stability after World War II is significantly greater than previously documented in the literature.

Technology Category

• Machine Learning: Feature Construction/Reformulation
• Game Theory and Economic Paradigms: Imperfect Information
• Application Domains: Humanities & Computational Social Science

Application Category

• Web Mining and Content Analysis: Robustness and generalizability of Web mining methods
• Economics, Online Markets and Human Computation: Sustainability of Web economics
• Graph Algorithms and Modeling for the Web: Efficient manipulation of static and dynamic Web-related graphs

Abstract

It is well established that the US prewar output was more volatile and less shock persistent than the postwar output. This is often attributed to the data interpolation employed to construct the prewar series. Our analytical results, however, indicate that commonly used linear interpolation has the opposite effect on shock persistence and volatility of a series - it increases shock persistence and reduces volatility. The surprising implication of this finding is that the actual differences between the volatility and shock persistence of the prewar and postwar output series are likely greater than the existing literature recognizes, and interpolation has dampened rather than magnified this difference. Consequently, the view that postwar output was more stable than prewar output because of the effectiveness of the postwar stabilization policies and institutional changes has considerable merit. Our results hold for parsimonious stationary and nonstationary time series commonly used to model macroeconomic time series

Problem

• interpolation
• output volatility
• shock persistence
• prewar-postwar comparison
• macroeconomic time series

Innovation

• linear interpolation
• output volatility
• shock persistence
• macroeconomic time series
• prewar-postwar comparison