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

Author

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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.

Suggested Citation

  • James Peery Cover & C. James Hueng, 2003. "The Correlation between Shocks to Output and the Price Level: Evidence from a Multivariate GARCH Model," Southern Economic Journal, Southern Economic Association, vol. 70(1), pages 75-92, July.
  • Handle: RePEc:sej:ancoec:v:70:1:y:2003:p:75-92
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    Cited by:

    1. 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.
    2. 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.
    3. 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.
    4. Eliphas Ndou & Nombulelo Gumata & Mthuli Ncube & Eric Olson, 2013. "Working Paper 189 - An Empirical Investigation of the Taylor Curve in South Africa," Working Paper Series 992, African Development Bank.
    5. Cover James Peery & Pecorino Paul, 2003. "Optimal Monetary Policy and the Correlation between Prices and Output," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-21, February.
    6. den Haan, Wouter J. & Sumner, Steven W., 2004. "The comovement between real activity and prices in the G7," European Economic Review, Elsevier, vol. 48(6), pages 1333-1347, December.
    7. George K. Davis & Bryce E. Kanago, 2008. "The Cyclical Behavior Of Prices And Relative Prices," Economic Inquiry, Western Economic Association International, vol. 46(4), pages 576-586, October.
    8. 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.

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