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The cyclical behavior of prices: interpreting the evidence

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  • John P. Judd
  • Bharat Trehan

Abstract

Whether prices are pro- or counter-cyclical represents a major difference in the predictions of models that focus on aggregate demand shocks as the primary source of business cycle fluctuations, versus those that emphasize shocks to aggregate supply. Earlier studies have interpreted their finding of generally negative cross-correlations between output and prices in the post-WWII U.S. as being more consistent with supply-driven models. In the present paper, we ask whether this interpretation is appropriate. We show that the signs of price-output correlations have little to say about which type shock generated them, or whether prices are best characterized as pro- or counter-cyclical. In fact, negative price output correlations can be generated from a variety of models, including demand-driven models that have pro-cyclical prices. (Revision of Working Paper 93-09)

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Papers in Applied Economic Theory with number 93-14.

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Date of creation: 1993
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Handle: RePEc:fip:fedfap:93-14

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Keywords: Prices ; Business cycles ; Econometric models;

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