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The Correlation between Shocks to Output and the Price Level: Evidence from a Multivariate GARCH Model

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  • James Peery Cover

    ()
    (Department of Economics, Finance, and Legal Studies, University of Alabama)

  • C. James Hueng

    ()
    (Department of Economics, Finance, and Legal Studies, University of Alabama)

Abstract

Previous research indicates that the price-output correlation is time varying. This paper therefore estimates a vector autoregression (VAR) model with a bivariate generalized autoregressive conditional heteroskedasticity (GARCH) error process to obtain quarterly estimates of the price-output correlation for the United States for the period 1876:IV–1999:IV. The estimated correlation is usually positive before 1945 and zero during 1945–1963. Negative correlations become important only after 1963 but do not become obviously more important than zero correlations. Prior to 1945, the estimated correlation typically is positive during both recessions and expansions. After 1945, the estimated correlation remains largely positive during recessions but becomes mainly negative during expansions, suggesting that changes in the sign of the price-output correlation are the result primarily of changes in its sign during expansions.

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Bibliographic Info

Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 70 (2003)
Issue (Month): 1 (July)
Pages: 75-92

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Handle: RePEc:sej:ancoec:v:70:1:y:2003:p:75-92

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Web page: http://www.southerneconomic.org/
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Cited by:
  1. George K Davis & Bryce E. Kanago, 2005. "Mismatching Measures of Output and Prices: Implications for Measuring the Comovement of Prices and Output," Macroeconomics 0501005, EconWPA.
  2. Ho, Kin Yip & Tsui, Albert K.C., 2004. "Analysis of real GDP growth rates of greater China: An asymmetric conditional volatility approach," China Economic Review, Elsevier, vol. 15(4), pages 424-442.
  3. Mauro Gallegati & Antonio Palestrini & Milena Petrini, 2008. "Cyclical Behavior Of Prices In The G7 Countries Through Wavelet Analysis," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 11(01), pages 119-130.
  4. Olson, Eric & Enders, Walter & Wohar, Mark E., 2012. "An empirical investigation of the Taylor curve," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 380-390.
  5. Aysen Arac & Funda Telatar & Erdinc Telatar, 2012. "Investigating the Time Varying Nature of the Link between Inflation and Currency Substitution in the Turkish Economy," Hacettepe University Department of Economics Working Papers 20122, Hacettepe University, Department of Economics.
  6. 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.

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