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Stochastic Trends and Short-Run Relationships Between Financial Variables and Real Activity

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  • Toru Konishi
  • Valerie A. Ramey
  • Clive W.J. Granger

Abstract

This paper re-examines the relationship between financial variables and real activity in a unified statistical framework. Using the methods of cointegration and separation. we characterize the long-run and short-run relationships between three sets of variables and then use the framework to assess the predictive power of alternative financial variables for real activity. Three main results emerge from the analysis. First, we show that although two sets of variables may not share the long-run trend. the error correction terms from one set of variables may have important explanatory power for the variables in another set. Second, we show that some of the key variables discussed in the literature can be interpreted as error correction terms from another system. Third, comparing two key error correction terms, M2 velocity and the interest rate spread between commercial paper and Treasury bills, we find that M2 velocity appears to be a more consistent predictor of output than is the interest rate spread.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4275.

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Date of creation: Feb 1993
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Handle: RePEc:nbr:nberwo:4275

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  1. Pierre Perron & Robert J. Shiller, 1984. "Testing the Random Walk Hypothesis: Power Versus Frequency of Observation," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 732, Cowles Foundation for Research in Economics, Yale University.
  2. King, Robert G. & Plosser, Charles I. & Stock, James H. & Watson, Mark W., 1991. "Stochastic Trends and Economic Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 81(4), pages 819-40, September.
  3. James G. MacKinnon, 2010. "Critical Values for Cointegration Tests," Working Papers, Queen's University, Department of Economics 1227, Queen's University, Department of Economics.
  4. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, American Economic Association, vol. 82(3), pages 472-92, June.
  5. Gonzalo, J. & Granger, C., 1992. "Estimation of Common Long-Memory Components in Cointegrated Systems," Papers, Boston University - Department of Economics 4, Boston University - Department of Economics.
  6. Granger, Clive W J, 1986. "Developments in the Study of Cointegrated Economic Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 48(3), pages 213-28, August.
  7. Perron, P., 1987. "Test Consistency with Varying Sampling Frequency," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 8752, Universite de Montreal, Departement de sciences economiques.
  8. Hall, Alastair R, 1994. "Testing for a Unit Root in Time Series with Pretest Data-Based Model Selection," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 12(4), pages 461-70, October.
  9. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 141-220 National Bureau of Economic Research, Inc.
  10. Hyllerberg, S. & Engle, R.F. & Granger, C.W.J. & Yoo, B.S., 1988. "Seasonal Integration And Cointegration," Papers, Pennsylvania State - Department of Economics 0-88-2, Pennsylvania State - Department of Economics.
  11. Ogaki, Masao & Park, Joon Y., 1997. "A cointegration approach to estimating preference parameters," Journal of Econometrics, Elsevier, Elsevier, vol. 82(1), pages 107-134.
  12. Ben Bernanke, 1990. "On the Predictive Power of Interest Rates and Interest Rate Spreads," NBER Working Papers 3486, National Bureau of Economic Research, Inc.
  13. James H. Stock & Mark W. Watson, 1989. "New Indexes of Coincident and Leading Economic Indicators," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 351-409 National Bureau of Economic Research, Inc.
  14. Robert B. Litterman & Laurence M. Weiss, 1984. "Money, real interest rates, and output: a reinterpretation of postwar U.S. data," Staff Report, Federal Reserve Bank of Minneapolis 89, Federal Reserve Bank of Minneapolis.
  15. Kashyap, Anil K & Stein, Jeremy C & Wilcox, David W, 1996. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance: Reply," American Economic Review, American Economic Association, American Economic Association, vol. 86(1), pages 310-14, March.
  16. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 251-76, March.
  17. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, Econometric Society, vol. 48(1), pages 1-48, January.
  18. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 12(2-3), pages 231-254.
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Cited by:
  1. Fernando Barran & Virginie Coudert & BenoƮt Mojon, 1995. "Interest Rates, Banking Spreads and Credit Supply: The Real Effects," Working Papers 1995-01, CEPII research center.
  2. Krylova, Elizaveta, 2002. "The Credit Channel of Monetary Policy. Case of Austria," Economics Series, Institute for Advanced Studies 111, Institute for Advanced Studies.
  3. Jerome Henry & Jens Weidmann, 2005. "The French-German Interest Rate Differential Since German," International Finance, EconWPA 0503009, EconWPA.
  4. Guglielmo Caporale & Nikitas Pittis, 1995. "Inflation convergence in the EMS: Some additional evidence. A reply," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 131(3), pages 587-593, September.
  5. Ramey, Valerie, 1993. "How important is the credit channel in the transmission of monetary policy?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 1-45, December.
  6. Kozicki, Sharon & Tinsley, P. A., 1999. "Vector rational error correction," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 23(9-10), pages 1299-1327, September.
  7. Caporale, Guglielmo Maria & Hassapis, Christis & Pittis, Nikitas, 1998. "Unit roots and long-run causality: investigating the relationship between output, money and interest rates," Economic Modelling, Elsevier, Elsevier, vol. 15(1), pages 91-112, January.
  8. Michael Dotsey & Christopher Otrok, 1994. "M2 and monetary policy: a critical review of the recent debate," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Win, pages 41-49.
  9. Charles S. Morris & Robert Neal & Douglas Rolph, 1998. "Credit spreads and interest rates : a cointegration approach," Research Working Paper, Federal Reserve Bank of Kansas City 98-08, Federal Reserve Bank of Kansas City.

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