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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. 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.
  2. John Y. Campbell & N. Gregory Mankiw, 1986. "Are Output Fluctuations Transitory?," NBER Working Papers 1916, National Bureau of Economic Research, Inc.
  3. Stulz, Rene M. & Wasserfallen, Walter, 1985. "Macroeconomic time-series, business cycles and macroeconomic policies," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 22(1), pages 9-53, January.
  4. Danny Quah, 1987. "What Do We Learn from Unit Roots in Macroeconomic Time Series?," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 469, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(1), pages 1-23, February.
  6. J. Bradford De Long & Lawrence H. Summers, 1985. "Is Increased Price Flexibility Stabilizing?," NBER Working Papers 1686, National Bureau of Economic Research, Inc.
  7. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbance," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 497, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Mankiw, N. Gregory, 1987. "The optimal collection of seigniorage : Theory and evidence," Journal of Monetary Economics, Elsevier, Elsevier, vol. 20(2), pages 327-341, September.
  9. Fama, Eugene F. & Gibbons, Michael R., 1982. "Inflation, real returns and capital investment," Journal of Monetary Economics, Elsevier, Elsevier, vol. 9(3), pages 297-323.
  10. Watson, Mark W., 1986. "Univariate detrending methods with stochastic trends," Journal of Monetary Economics, Elsevier, Elsevier, vol. 18(1), pages 49-75, July.
  11. Clark, Peter K, 1987. "The Cyclical Component of U.S. Economic Activity," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(4), pages 797-814, November.
  12. 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.
  13. Stock, James H. & Watson, Mark W., 1986. "Does GNP have a unit root?," Economics Letters, Elsevier, Elsevier, vol. 22(2-3), pages 147-151.
  14. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(5), pages 893-920, October.
  15. Walsh, Carl E, 1986. "In Defense of Base Drift," American Economic Review, American Economic Association, American Economic Association, vol. 76(4), pages 692-700, September.
  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, Elsevier, vol. 10(2), pages 139-162.
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Cited by:
  1. 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, Federal Reserve Bank of Minneapolis 217, Federal Reserve Bank of Minneapolis.
  2. Danny Quah, 1991. "The Relative Importance of Permanent and Transitory Components: Identification and Some Theoretical Bounds," FMG Discussion Papers, Financial Markets Group dp126, Financial Markets Group.
  3. 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, International Atlantic Economic Society, vol. 28(3), pages 315-332, September.
  4. Charles Engel & Nelson C. Mark & Kenneth D. West, 2007. "Exchange Rate Models Are Not as Bad as You Think," NBER Working Papers 13318, National Bureau of Economic Research, Inc.
  5. Gilberto Libanio, 2005. "Unit roots in macroeconomic time series: theory, implications, and evidence," Nova Economia, Economics Department, Universidade Federal de Minas Gerais (Brazil), Economics Department, Universidade Federal de Minas Gerais (Brazil), vol. 15(3), pages 145-176, September.
  6. Ambler, Steven & Cardia, Emanuela & Phaneuf, Louis, 1992. "Contrats de salaire, croissance endogène et fluctuations," L'Actualité Economique, Société Canadienne de Science Economique, Société Canadienne de Science Economique, vol. 68(1), pages 175-204, mars et j.
  7. 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.
  8. Benigno, Gianluca, 2004. "Real exchange rate persistence and monetary policy rules," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(3), pages 473-502, April.
  9. F. Goerlich, 1991. "Persistencia en las fluctuaciones económicas: evidencia para el caso español," Investigaciones Economicas, Fundación SEPI, Fundación SEPI, vol. 15(1), pages 193-202, January.
  10. Surajit Deb, 2003. "Terms of Trade and Supply Response of Indian Agriculture: Analysis in Cointegration Framework," Working papers, Centre for Development Economics, Delhi School of Economics 115, Centre for Development Economics, Delhi School of Economics.
  11. W A Razzak, 2007. "A Perspective on Unit Root and Cointegration in Applied Macroeconomics," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, Euro-American Association of Economic Development, vol. 4(1), pages 77-102.
  12. Spronk, Richard & Verschoor, Willem F.C. & Zwinkels, Remco C.J., 2013. "Carry trade and foreign exchange rate puzzles," European Economic Review, Elsevier, Elsevier, vol. 60(C), pages 17-31.
  13. 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.

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