Nelson-Plosser Revisited: The ACF Approach
31 Pages Posted: 13 Jan 2012 Last revised: 26 Feb 2012
Date Written: January 13, 2012
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 autoregressive 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.
JEL Classification: C22, E32, E52, E63
Suggested Citation: Suggested Citation