Given the unobserved nature of expectations, this paper employs latent variable analysis to examine three financial instability models and assess their out-of-sample forecasting accuracy. We compare a benchmark linear random walk model, which implies exogenous instability phenomena, with a...

Our analysis, conducted using the GDP and the GDP deflator time series (OECD source; 1960–2001) for the G7 countries, shows the robustness of the negative covariance between the GDP and its deflator, but only over long run horizons. Through wavelet decomposition we evaluate the price–output...