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On the Interpretation of Near Random-Walk Behavior in GNP

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  • Kenneth D. West

Abstract

It is shown that GNP will have an autoregressive root very close to unity in a variant of Taylor's (1980a,b) overlapping wage contracts model, for stylized versions of simple money supply rules and plausible values for the model's parameters. In this variant, monetary policy is the only reason for serial correlation in GNP. It is premature, therefore, to conclude, as some authors, have, that the presence of such a root in U.S. GNP is inconsistent with either a stationary natural rate or with nominal shocks playing a major role in the business cycle.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2364.

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Date of creation: Aug 1987
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Publication status: published as American Economic Review, Vol. 78, No. 1, March 1988, pp. 202-209.
Handle: RePEc:nbr:nberwo:2364

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  1. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October.
  2. N. Gregory Mankiw, 1987. "The Optimal Collection of Seigniorage: Theory and Evidence," NBER Working Papers 2270, National Bureau of Economic Research, Inc.
  3. Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1987. "Stochastic Trends and Economic Fluctuations," NBER Working Papers 2229, National Bureau of Economic Research, Inc.
  4. repec:nbr:nberre:0126 is not listed on IDEAS
  5. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September.
  6. Danny Quah, 1987. "What Do We Learn from Unit Roots in Macroeconomic Time Series?," Working papers 469, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Walsh, Carl E, 1986. "In Defense of Base Drift," American Economic Review, American Economic Association, vol. 76(4), pages 692-700, September.
  8. Fama, Eugene F. & Gibbons, Michael R., 1982. "Inflation, real returns and capital investment," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 297-323.
  9. Clark, Peter K, 1987. "The Cyclical Component of U.S. Economic Activity," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 797-814, November.
  10. Watson, Mark W., 1986. "Univariate detrending methods with stochastic trends," Journal of Monetary Economics, Elsevier, vol. 18(1), pages 49-75, July.
  11. J. Bradford De Long & Lawrence H. Summers, 1985. "Is Increased Price Flexibility Stabilizing?," NBER Working Papers 1686, National Bureau of Economic Research, Inc.
  12. Campbell, John Y & Mankiw, N Gregory, 1987. "Are Output Fluctuations Transitory?," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 857-80, November.
  13. Stock, James H. & Watson, Mark W., 1986. "Does GNP have a unit root?," Economics Letters, Elsevier, vol. 22(2-3), pages 147-151.
  14. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  15. Stulz, Rene M. & Wasserfallen, Walter, 1985. "Macroeconomic time-series, business cycles and macroeconomic policies," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 22(1), pages 9-53, January.
  16. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
  17. Benjamin M. Friedman, 1977. "The Inefficiency of Short-Run Monetary Targets for Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(2), pages 293-346.
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Cited by:
  1. Ambler, S. & Cardia, E. & Phaneuf, L., 1991. "contracts de salaire, croissance endogene et fluctuations," Cahiers de recherche 9124, Universite de Montreal, Departement de sciences economiques.
  2. Quah, Danny, 1992. "The Relative Importance of Permanent and Transitory Components: Identification and Some Theoretical Bounds," Econometrica, Econometric Society, vol. 60(1), pages 107-18, January.
  3. Charles Engel & Nelson C. Mark & Kenneth D. West, 2008. "Exchange Rate Models Are Not As Bad As You Think," NBER Chapters, in: NBER Macroeconomics Annual 2007, Volume 22, pages 381-441 National Bureau of Economic Research, Inc.
  4. Alberto Giovannini, 1988. "The Macroeconomics of Exchange-rate and Price-level Interactions: Empirical Evidence for West Germany," NBER Working Papers 2544, National Bureau of Economic Research, Inc.
  5. F. Goerlich, 1991. "Persistencia en las fluctuaciones económicas: evidencia para el caso español," Investigaciones Economicas, Fundación SEPI, vol. 15(1), pages 193-202, January.
  6. Spronk, Richard & Verschoor, Willem F.C. & Zwinkels, Remco C.J., 2013. "Carry trade and foreign exchange rate puzzles," European Economic Review, Elsevier, vol. 60(C), pages 17-31.
  7. Gilberto A. Libanio, 2004. "Unit roots in macroeconomic time series: a post Keynesian interpretation," Textos para Discussão Cedeplar-UFMG td233, Cedeplar, Universidade Federal de Minas Gerais.
  8. Donald Freeman & David Yerger, 2000. "Does inflation lower productivity? Time series evidence on the impact of inflation on labor productivity in 12 OECD nations," Atlantic Economic Journal, International Atlantic Economic Society, vol. 28(3), pages 315-332, September.
  9. Benigno, Gianluca, 2004. "Real exchange rate persistence and monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 473-502, April.
  10. Gilberto Libanio, 2005. "Unit roots in macroeconomic time series: theory, implications, and evidence," Nova Economia, Economics Department, Universidade Federal de Minas Gerais (Brazil), vol. 15(3), pages 145-176, September.
  11. Razzak, Weshah, 2003. "A Perspective on Unit Root and Cointegration in Applied Macroeconomics," MPRA Paper 1970, University Library of Munich, Germany, revised 2007.
  12. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1998. "Sticky price models of the business cycle: can the contract multiplier solve the persistence problem?," Staff Report 217, Federal Reserve Bank of Minneapolis.
  13. Surajit Deb, 2003. "Terms of Trade and Supply Response of Indian Agriculture: Analysis in Cointegration Framework," Working papers 115, Centre for Development Economics, Delhi School of Economics.

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