Money, Income and Sunspots

Measuring Economic Relationships and the Effects of Differencing

Charles I. Plosser

President, Federal Reserve Bank of Philadelphia,
and University of Rochester, Rochester, NY 14627

G. William Schwert

University of Rochester, Rochester, NY 14627
and National Bureau of Economic Research

Journal of Monetary Economics, 4 (November 1978) 637-660

This paper discusses the question of whether economic time series regression models should be estimated between the levels or the changes of the variables of interest. We argue that many economic models should be estimated between the changes of the variables, rather than the levels of the variables. In addition, comparisons of the levels and changes regressions can be used as a crude test of model specification. These issues are illustrated with examples from Friedman and Meiselman's [1963] study of annual income and consumption and with data on sunspot activity from 1897-1958.

Key words: Differencing, Stationarity, Spurious regressions

JEL Classifications: C22

Cited 121 times in the SSCI and SCOPUS through 2014
© Copyright 1978, Elsevier
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