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Output and Inflation in the Long Run

  • Neil R. Ericsson


    (Federal Reserve Board)

  • John S. Irons


    (Amherst College)

  • Ralph W. Tryon


    (Federal Reserve Board)

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. Output and inflation are positively related in these cointegrating relationships: a price markup model helps interpret this surprising feature.

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Paper provided by Amherst College, Department of Economics in its series Amherst Economic Papers with number 2000.01.

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Length: 16 pages + Appendix
Date of creation: 24 Oct 2000
Date of revision: 24 Oct 2000
Publication status: Forthcoming, Journal of Applied Econometrics
Handle: RePEc:aep:acewpa:2000.01
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