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The Comovement Between Forecast Errors for Real GDP and Its Deflator in Six OECD Countries: Did Supply Shocks Become Less Dominant During the Great Moderation?

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  • Bryce Kanago

    (University of Northern Iowa)

Abstract

A negative correlation between forecast errors of the price level and real output is evidence that prices are countercyclical and so evidence for the dominance of supply shocks. We examine the correlation between the forecast errors of real GDP and its deflator for six OECD countries. With the exceptions of the United Kingdom and the United States, previous research used errors from an Index of Industrial Production and the Consumer Price Index. Using real GDP and the GDP deflator, the patterns of correlations over forecast horizons for Canada, France, Italy, and Japan do not match closely with that of either the UK or the US. Using a longer sample than previous studies we find evidence that the correlations are greater and often positive after 1981 indicating diminished dominance of supply shocks. This decrease is associated with decreases in both the relative frequency and relative size of the negative products of the forecast errors.

Suggested Citation

  • Bryce Kanago, 2023. "The Comovement Between Forecast Errors for Real GDP and Its Deflator in Six OECD Countries: Did Supply Shocks Become Less Dominant During the Great Moderation?," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 19(2), pages 149-169, September.
    • Handle: RePEc:spr:jbuscr:v:19:y:2023:i:2:d:10.1007_s41549-023-00086-0
    DOI: 10.1007/s41549-023-00086-0
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    References listed on IDEAS

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    More about this item

    Keywords

    Cycles; Inflation; Vector Autoregressions; Forecasts;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E39 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Other

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