Nelson-Plosser revisited: The ACF approach

Karim M. Abadir, Giovanni Caggiano, Gabriel Talmain

Research output: Contribution to journalArticleResearchpeer-review

7 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)22-34
Number of pages13
JournalJournal of Econometrics
Volume175
Issue number1
DOIs
Publication statusPublished - Jul 2013
Externally publishedYes

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