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Price Prediction Errors and Real Activity: A Reassessment

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Author Info
Gray, Jo Anna
Spencer, David E
Abstract

Rational expectations, natural-rate macro-models in which aggregate demand disturbances affect the real sector through price prediction errors, while powerful and tractable analytical tools, are often perceived to be of questionable empirical relevance. This paper reexamines the empirical role of price prediction errors in determining the level of real aggregate activity. The approach is distinguished by accounting for aggregate supply-side disturbances and by more careful treatment of natural rates. Contrary to some previous studies, the authors find considerable empirical support for the hypothesis that demand-driven price level surprises are positively and significantly correlated with aggregate real economic activity. Copyright 1990 by Oxford University Press.

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Article provided by Oxford University Press in its journal Economic Inquiry.

Volume (Year): 28 (1990)
Issue (Month): 4 (October)
Pages: 658-81
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Handle: RePEc:oup:ecinqu:v:28:y:1990:i:4:p:658-81

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  1. Maria W. Otoo, 1999. "Temporary employment and the natural rate of unemployment," Finance and Economics Discussion Series 1999-66, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  2. Michael D. Bordo & Michael J. Dueker & David C. Wheelock, 2001. "Aggregate price shocks and financial instability: a historical analysis," Working Papers 2000-005, Federal Reserve Bank of St. Louis. [Downloadable!]
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  3. Robert Dittmar & William T. Gavin, 2000. "What do New-Keynesian Phillips Curves imply for price-level targeting?," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 21-30. [Downloadable!]
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