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The comovement between real activity and prices in the G7

  • den Haan, Wouter J.
  • Sumner, Steven W.

In this Paper, we study the short-run and long-run comovement between prices and real activity in the G7 countries during the postwar period using VAR forecast errors and frequency domain filters. We find that there are several patterns of the correlation coefficients that are the same in all countries. In particular, the correlation at the ‘long-run’ horizon is virtually always negative and the correlation at the ‘short-run’ horizon is typically substantially higher. Although there is evidence of positive ‘short-run’ correlations for some countries it is not very robust to the choice of the price and output variables. In addition, we propose a more efficient method to calculate the covariances of VAR forecast errors and - in contrast to claims made in the literature - we show that band-pass filters isolate the desired set of frequencies not only when the series are stationary but also when they are first or second-order integrated processes.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 48 (2004)
Issue (Month): 6 (December)
Pages: 1333-1347

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Handle: RePEc:eee:eecrev:v:48:y:2004:i:6:p:1333-1347
Contact details of provider: Web page: http://www.elsevier.com/locate/eer

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  1. Bernanke, Ben S. & Mihov, Ilian, 1995. "Measuring Monetary Policy," Economics Series 10, Institute for Advanced Studies.
  2. 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.
  3. Judd, John P & Trehan, Bharat, 1995. "The Cyclical Behavior of Prices: Interpreting the Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 789-97, August.
  4. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  10. Fiorito, Riccardo & Kollintzas, Tryphon, 1994. "Stylized facts of business cycles in the G7 from a real business cycles perspective," European Economic Review, Elsevier, vol. 38(2), pages 235-269, February.
  11. Laurence Ball & N. Gregory Mankiw, 1994. "A sticky-price manifesto," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
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  14. R. F. Engle, 1972. "Band Spectrum Regressions," Working papers 96, Massachusetts Institute of Technology (MIT), Department of Economics.
  15. den Haan, Wouter J., 2000. "The comovement between output and prices," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 3-30, August.
  16. Bankim Chadha & Eswar Prasad, 1993. "Interpreting the Cyclical Behavior of Prices," IMF Staff Papers, Palgrave Macmillan, vol. 40(2), pages 266-298, June.
  17. John Geweke, 1999. "Computational Experiments and Reality," Computing in Economics and Finance 1999 401, Society for Computational Economics.
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