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The Cyclical Behavior of Prices: Interpreting the Evidence

  • Judd, John P
  • Trehan, Bharat

Previous studies of the cyclical behavior of prices have found that the cross-correlations between output and prices in post-WWII U.S. data are generally negative. These correlations h have been interpreted as being more consistent with supply-driven models of business cycle fluctuations than with models that focus on demand shocks. In this paper, the authors show that the signs of price-output correlations provide little information about the underlying shock; for instance, a simple Keynesian model driven by demand shocks leads to negative correlations between these variables. The authors' results suggest that price-output correlations may not be a particularly useful way to characterize the cyclical behavior of prices. Copyright 1995 by Ohio State University Press.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 27 (1995)
Issue (Month): 3 (August)
Pages: 789-97

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Handle: RePEc:mcb:jmoncb:v:27:y:1995:i:3:p:789-97
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