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Interpreting the Cyclical Behavior of Prices

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  • Bankim Chadha

    (International Monetary Fund)

  • Eswar Prasad

    (International Monetary Fund)

Abstract

This paper argues that determining the cyclical behavior of prices by applying the same stationarity-inducing transformation to the levels of both output and prices, and examining the correlations of the resulting series, can be misleading. A more appropriate procedure is to examine the correlations between the rate of inflation and the level of the cyclical component of output. In postwar U.S. data, the correlations between similarly transformed price and output data are consistently and often strongly negative. The rate of inflation, however, is consistently and usually strongly positively correlated with various measures of the cyclical component of output.

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.

Volume (Year): 40 (1993)
Issue (Month): 2 (June)
Pages: 266-298

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Handle: RePEc:pal:imfstp:v:40:y:1993:i:2:p:266-298

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Cited by:
  1. Smant, David J. C., 1998. "Modelling trends, expectations and the cyclical behaviour of prices," Economic Modelling, Elsevier, vol. 15(1), pages 151-161, January.
  2. Chadha, Bankim & Tsiddon, Daniel, 1998. "Inflation, nominal interest rates and the variability of output," Journal of Monetary Economics, Elsevier, vol. 42(3), pages 547-573, October.
  3. Kennedy, James E., 1998. "An Analysis of Time-Series Estimates of Capacity Utilization," Journal of Macroeconomics, Elsevier, vol. 20(1), pages 169-187, January.
  4. Yang-Woo Kim, 1996. "Are prices countercyclical? Evidence from East Asian countries," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 69-82.
  5. Pakko, Michael R, 2000. "The Cyclical Relationship between Output and Prices: An Analysis in the Frequency Domain," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 382-99, August.
  6. den Haan, Wouter J., 2000. "The comovement between output and prices," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 3-30, August.
  7. Wouter J. den Haan, 2002. "The Comovement between Real Activity and Prices in the G7," Tinbergen Institute Discussion Papers 02-092/2, Tinbergen Institute.
  8. Michael Kiley, 2002. "The lead of output over inflation in sticky price models," Economics Bulletin, AccessEcon, vol. 5(5), pages 1-7.
  9. 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.
  10. Wouter J. Den Haan & Steven Sumner, 2001. "The Comovements between Real Activity and Prices in the G7," NBER Working Papers 8195, National Bureau of Economic Research, Inc.
  11. Kamilya Tazhibayeva & Aasim M. Husain & Anna Ter-Martirosyan, 2008. "Fiscal Policy and Economic Cycles in Oil-Exporting Countries," IMF Working Papers 08/253, International Monetary Fund.
  12. 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.

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