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Nelson–Plosser revisited: The ACF approach

Listed author(s):
  • Abadir, Karim M.
  • Caggiano, Giovanni
  • Talmain, Gabriel

We detect a new stylized fact that is common to the dynamics of all macroeconomic series, including financial aggregates. Their Auto-Correlation Functions (ACFs) share a common four-parameter functional form that arises from the dynamics of a general equilibrium model with heterogeneous firms. We find that, not only does our formula fit the data better than the ACFs that arise from auto-regressive and fractionally-integrated models, but it also yields the correct shape of the ACF, thus explaining the lags with which macroeconomic variables evolve and the onset of seemingly-sudden turning points. This finding puts a premium on quick and decisive macroeconomic policy interventions at the first signs of a turning point, in contrast to gradualist approaches.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304407613000419
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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 175 (2013)
Issue (Month): 1 ()
Pages: 22-34

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Handle: RePEc:eee:econom:v:175:y:2013:i:1:p:22-34
DOI: 10.1016/j.jeconom.2013.02.006
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

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