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Why Did the Sign of the Price-Output Correlation Change? Evidence from a Structural VAR with GARCH Errors

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  • James Peery Cover

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

  • C. James Hueng

    ()
    (Department of Economics, Western Michigan University)

Abstract

It is generally agreed that the price-output correlation in the United States was positive prior to the Second World War, but became negative during the postwar period (at least by 1972). This paper offers evidence that the price-output correlation changed signs because of a decrease in the variability of aggregate demand. A structural VAR with bivariate GARCH (1,1) errors is used to estimate a times series of price-output correlations as well as of the conditional variances of the structural shocks to AD and AS. It is found that during the postwar period the price-output correlation is negative and significantly different from zero only when the standard deviation of the AD shock is less than that of the AS shock.

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Bibliographic Info

Paper provided by Ball State University, Department of Economics in its series Working Papers with number 200602.

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Length: 27 pages
Date of creation: Mar 2006
Date of revision: Mar 2006
Handle: RePEc:bsu:wpaper:200602

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Keywords: Price-Output Correlation; Structural VAR; Supply and Demand Shocks; Blanchard-Quah Decomposition;

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