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The Cyclical Behavior of Prices: Interpreting the Evidence

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  • Judd, John P
  • Trehan, Bharat

Abstract

Previous studies of the cyclical behavior of prices have found that the cross-correlations between output and prices in post-WWII U.S. data are generally negative. These correlations h have been interpreted as being more consistent with supply-driven models of business cycle fluctuations than with models that focus on demand shocks. In this paper, the authors show that the signs of price-output correlations provide little information about the underlying shock; for instance, a simple Keynesian model driven by demand shocks leads to negative correlations between these variables. The authors' results suggest that price-output correlations may not be a particularly useful way to characterize the cyclical behavior of prices. Copyright 1995 by Ohio State University Press.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 27 (1995)
Issue (Month): 3 (August)
Pages: 789-97

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Handle: RePEc:mcb:jmoncb:v:27:y:1995:i:3:p:789-97

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Cited by:
  1. David Smant, 1996. "Re-examining the cyclical behaviour of prices and output," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 132(4), pages 651-674, December.
  2. den Haan, Wouter J. & Sumner, Steven W., 2004. "The comovement between real activity and prices in the G7," European Economic Review, Elsevier, vol. 48(6), pages 1333-1347, December.
  3. Fabio Canova & Gianni de Nicoló, 1999. "On the sources of business cycles in the G-7," Economics Working Papers 459, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2000.
  4. Julio J. Rotemberg, 1994. "Prices, Output and Hours: An Empirical Analysis Based on a Sticky Price Model," NBER Working Papers 4948, National Bureau of Economic Research, Inc.
  5. Michael R. Pakko, 1997. "The cyclical relationship between output and prices: an analysis in the frequency domain," Working Papers 1997-007, Federal Reserve Bank of St. Louis.
  6. James A. Kahn & Margaret M. McConnell & Gabriel Perez-Quiros, 2002. "On the causes of the increased stability of the U.S. economy," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 183-202.
  7. James Peery Cover & C. James Hueng, 2006. "Why Did the Sign of the Price-Output Correlation Change? Evidence from a Structural VAR with GARCH Errors," Working Papers 200602, Ball State University, Department of Economics, revised Mar 2006.
  8. Hartley, Peter R. & Whitt Jr, Joseph A., 2003. "Macroeconomic fluctuations: Demand or supply, permanent or temporary?," European Economic Review, Elsevier, vol. 47(1), pages 61-94, February.
  9. Agenor, Pierre-Richard & McDermott, C John & Prasad, Eswar S, 2000. "Macroeconomic Fluctuations in Developing Countries: Some Stylized Facts," World Bank Economic Review, World Bank Group, vol. 14(2), pages 251-85, May.
  10. Francesco Busato, 2004. "Relative Demand Shocks," Economics Working Papers 2004-11, School of Economics and Management, University of Aarhus.
  11. Paul Cashin & Sam Ouliaris, 2001. "Key Features of Australian Business Cycles," IMF Working Papers 01/171, International Monetary Fund.
  12. Smant, David J. C., 1998. "Modelling trends, expectations and the cyclical behaviour of prices," Economic Modelling, Elsevier, vol. 15(1), pages 151-161, January.
  13. P J Pérez, 2001. "Cyclical Properties in the Main Western Economies," Centre for Growth and Business Cycle Research Discussion Paper Series 33, Economics, The Univeristy of Manchester.
  14. repec:ebl:ecbull:v:5:y:2002:i:5:p:1-7 is not listed on IDEAS
  15. Brian Motley, 1998. "Growth and inflation: a cross-country study," Economic Review, Federal Reserve Bank of San Francisco, pages 15-28.
  16. Yang-Woo Kim, 1996. "Are prices countercyclical? Evidence from East Asian countries," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 69-82.
  17. den Haan, Wouter J., 2000. "The comovement between output and prices," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 3-30, August.
  18. Dean Croushore, 1998. "Low inflation: the surprise of the 1990s," Business Review, Federal Reserve Bank of Philadelphia, issue Jul, pages 3-12.

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