Money, Financial Instability and Stabilization Policy

Money, Financial Instability and Stabilization Policy

Edited by L. Randall Wray

Money, Financial Instability and Stabilization Policy consists of original articles by leading Post Keynesians, Kaleckians and other heterodox economists from the developed and developing world. Post Keynesian literature has long been associated with the study of money, financial markets and financial instability. Indeed, this is perhaps the area to which Post Keynesians have made the greatest contributions. The authors to this volume present an overview of the latest research on monetary theory and policy, financial markets, and financial instability coming out of the Post Keynesian school of thought. They provide an indication of the wide-ranging interests and of the truly international scope of Post Keynesian research. The first half of the volume is theoretical, while the second half includes papers that are either empirical or more focused on specific concerns.

Chapter 7: Unit Roots in Macroeconomic Time Series and Stabilization Policies: A Post Keynesian Interpretation

Gilberto A. Libanio

Subjects: development studies, development economics, economics and finance, development economics, post-keynesian economics


Gilberto A. Libanio Introduction The question of whether or not macroeconomic time series present a unit root has been exhaustively discussed within the mainstream of economics in the last two decades. The work of Nelson and Plosser (1982) is usually recognized as the starting point of this literature, with significant implications for econometric modelling, for business cycle theorizing, and for economic policy prescriptions. The presence or absence of unit roots, to put it in a simple way, helps identify some features of the underlying data-generating process of a series. If a series has no unit roots, it is characterized as stationary, and therefore exhibits mean reversion in that it fluctuates around a constant long-run mean. Also the absence of unit roots implies that the series has a finite variance which does not depend on time (this point is crucial for economic forecasting), and that the effects of shocks dissipate over time. Alternatively, if the series feature a unit root, they are better characterized as non-stationary processes that have no tendency to return to a long-run deterministic path. Besides, the variance of the series is time-dependent and goes to infinity as time approaches infinity, which results in serious problems for forecasting. Finally, non-stationary series suffer permanent effects from random shocks. As usually denominated in the literature, series with unit roots follow a random walk. In sum, the existence (or not) of unit roots in macroeconomic time series brings about important implications, and this helps to explain why this topic has received...

You are not authenticated to view the full text of this chapter or article.

Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.

Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.

Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.

Further information