Stochastic Trends and Short-Run Relationships between Financial Variables and Real Activity

33 Pages Posted: 4 Jul 2004 Last revised: 13 Sep 2010

See all articles by Toru Konishi

Toru Konishi

World Bank - Social Development; National Bureau of Economic Research (NBER)

Valerie A. Ramey

University of California at San Diego; National Bureau of Economic Research (NBER)

Clive W. J. Granger

University of California, San Diego (UCSD) - Department of Economics; Tinbergen Institute

Date Written: February 1993

Abstract

This paper re-examines the relationship between financial variables and real activity in a unified statistical framework. Using the methods of cointegration and separation. we characterize the long-run and short-run relationships between three sets of variables and then use the framework to assess the predictive power of alternative financial variables for real activity. Three main results emerge from the analysis. First, we show that although two sets of variables may not share the long-run trend. the error correction terms from one set of variables may have important explanatory power for the variables in another set. Second, we show that some of the key variables discussed in the literature can be interpreted as error correction terms from another system. Third, comparing two key error correction terms, M2 velocity and the interest rate spread between commercial paper and Treasury bills, we find that M2 velocity appears to be a more consistent predictor of output than is the interest rate spread.

Suggested Citation

Konishi, Toru and Ramey, Valerie A. and Granger, Clive W. J., Stochastic Trends and Short-Run Relationships between Financial Variables and Real Activity (February 1993). NBER Working Paper No. w4275. Available at SSRN: https://ssrn.com/abstract=227069

Toru Konishi (Contact Author)

World Bank - Social Development ( email )

1818 H Street
Washington, DC 20433
United States
202-473-2351 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Valerie A. Ramey

University of California at San Diego ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-534-2388 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Clive W. J. Granger

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-534-3383 (Phone)
858-534-7040 (Fax)

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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