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Working Paper
Near common factors and confidence regions for present value models
The evidence for excess smoothness of aggregate consumption and excess volatility of stock prices is reexamined, using a method that nests parsimonious trend- and difference-stationary specifications of the forcing processes. The confidence interval for the present value of an innovation to labor income is found to be very wide, so that aggregate consumption may be anything from much too smooth to much too volatile. The confidence interval for the present value of an innovation to dividends is narrower and weakly supports excess volatility in the stock market.
Working Paper
Near observational equivalence and persistence in GNP
The question of whether aggregate output is best described as a trend-stationary (TS) or as a difference-stationary (DS, or unit root) process continues to generate a substantial volume of research a dozen years after it was first raised by Nelson and Plosser (1982), including a recent paper by Rudebusch (1993). Rudebusch argues that "Based on the usual unit root tests, little can be said about the relative likelihood of the specific DS and TS models of real GNP." Rudebusch concludes by emphasizing "the importance of measuring the confidence intervals for estimates of persistence without ...
Journal Article
Interest in the future
Journal Article
Yield curve forecasts of inflation: a cautionary tale
Long-term interest rates that are unusually high relative to shortterm interest rates are often seen to reflect market expectations of increasing inflation. Given that the term structure of interest rates (also called the yield curve) reacts to inflation expectations, does it do so in a reasonable manner? Does the term structure embody inflation forecasts that bear a sensible relationship to the iiaflation that in fact occurs? ; This article reviews the theoretical link between the term structure and inflation expectations, and then it provides empirical evidence on the link in light of the ...