Output and inflation in the long run

Cross-country regressions explaining output growth often obtain a negative effect from inflation. However, that result is not robust, due to the selec tion of countries in sample, temporal aggregation, and omission of conseque ntial variables in levels. This paper demonstrates some implications of the se mis-specifications, both analytically and empirically. In particular, fo r most G-7 countries, annual time series of inflation and the log-level of output are cointegrated, thus rejecting the existence of a long-run relatio n between output growth and inflation. Typically, output and inflation are positively related in these cointegrating relationships: a price markup mod el helps to interpret this surprising feature. Copyright (C) 2001 John Wile y & Sons, Ltd.