Nelson-Plosser revisited: the ACF approach

Abadir, K.M., Caggiano, G. and Talmain, G. (2013) Nelson-Plosser revisited: the ACF approach. Journal of Econometrics, 175(1), pp. 22-34. (doi: 10.1016/j.jeconom.2013.02.006)

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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.

Item Type:Articles
Glasgow Author(s) Enlighten ID:Talmain, Professor Gabriel
Authors: Abadir, K.M., Caggiano, G., and Talmain, G.
Subjects:H Social Sciences > HG Finance
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Journal of Econometrics

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