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Output and inflation in the long run

  • Neil R. Ericsson

    (Stop 22, Division of International Finance, Federal Reserve Board, 2000 C Street, NW, Washington, DC 20551, USA)

  • John S. Irons

    (Department of Economics, Amherst College, Amherst, MA 01002-5000, USA)

  • Ralph W. Tryon

    (Stop 24, Division of International Finance, Federal Reserve Board, 2000 C Street, NW, Washington, DC 20551, USA)

Cross-country regressions explaining output growth often obtain a negative effect from inflation. However, that result is not robust, due to the selection of countries in sample, temporal aggregation, and omission of consequential variables in levels. This paper demonstrates some implications of these mis-specifications, both analytically and empirically. In particular, for most G-7 countries, annual time series of inflation and the log-level of output are cointegrated, thus rejecting the existence of a long-run relation between output growth and inflation. Typically, output and inflation are positively related in these cointegrating relationships: a price markup model helps to interpret this surprising feature. Copyright © 2001 John Wiley & Sons, Ltd.

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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 16 (2001)
Issue (Month): 3 ()
Pages: 241-253

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Handle: RePEc:jae:japmet:v:16:y:2001:i:3:p:241-253
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