Why Did the Sign of the Price-Output Correlation Change? Evidence from a Structural VAR with GARCH Errors
It is generally agreed that the price-output correlation in the United States was positive prior to the Second World War, but became negative during the postwar period (at least by 1972). This paper offers evidence that the price-output correlation changed signs because of a decrease in the variability of aggregate demand. A structural VAR with bivariate GARCH (1,1) errors is used to estimate a times series of price-output correlations as well as of the conditional variances of the structural shocks to AD and AS. It is found that during the postwar period the price-output correlation is negative and significantly different from zero only when the standard deviation of the AD shock is less than that of the AS shock.
|Date of creation:||Mar 2006|
|Date of revision:||Mar 2006|
|Contact details of provider:|| Postal: Muncie, Indiana 47306|
Phone: (765) 285-5360
Fax: (765) 285-8024
Web page: http://www.bsu.edu/econ
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Olivier Jean Blanchard & Danny Quah, 1988.
"The Dynamic Effects of Aggregate Demand and Supply Disturbance,"
497, Massachusetts Institute of Technology (MIT), Department of Economics.
- Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
- 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.
- Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
- Holger C. Wolf, 1991. "Procyclical prices: a demi-myth?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 25-28.
- Robert J. Gordon, 1986. "The American Business Cycle: Continuity and Change," NBER Books, National Bureau of Economic Research, Inc, number gord86-1, April.
- Finn E. Kydland & Edward C. Prescott, 1990. "Business cycles: real facts and a monetary myth," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-18.
- James Hartley, 1999. "Real myths and a monetary fact," Applied Economics, Taylor & Francis Journals, vol. 31(11), pages 1325-1329.
- Arthur F. Burns & Wesley C. Mitchell, 1946. "Measuring Business Cycles," NBER Books, National Bureau of Economic Research, Inc, number burn46-1, April.
- Cooley, Thomas F. & Ohanian, Lee E., 1991. "The cyclical behavior of prices," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 25-60, August.
- Cooley, T.F. & Ohanian, L.E., 1989. "The Cyclical Behavior Of Prices," RCER Working Papers 188, University of Rochester - Center for Economic Research (RCER).
- Smith, R Todd, 1992. "The Cyclical Behavior of Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(4), pages 413-430, November.
- Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
- Mankiw, N Gregory, 1989. "Real Business Cycles: A New Keynesian Perspective," Journal of Economic Perspectives, American Economic Association, vol. 3(3), pages 79-90, Summer.
- N. Gregory Mankiw, 1989. "Real Business Cycles: A New Keynesian Perspective," NBER Working Papers 2882, National Bureau of Economic Research, Inc.
- Ball, Laurence & Mankiw, N. Gregory, 1994. "A sticky-price manifesto," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 127-151, December.
- Laurence Ball & N. Gregory Mankiw, 1994. "A sticky-price manifesto," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
- Laurence Ball & N. Gregory Mankiw, 1994. "A Sticky-Price Manifesto," NBER Working Papers 4677, National Bureau of Economic Research, Inc.
- Cover, James Peery & Enders, Walter & Hueng, C. James, 2006. "Using the Aggregate Demand-Aggregate Supply Model to Identify Structural Demand-Side and Supply-Side Shocks: Results Using a Bivariate VAR," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(3), pages 777-790, April.
- Backus, David K & Kehoe, Patrick J, 1992. "International Evidence of the Historical Properties of Business Cycles," American Economic Review, American Economic Association, vol. 82(4), pages 864-888, September.
- David K. Backus & Patrick J. Kehoe, 1991. "International evidence on the historical properties of business cycles," Staff Report 145, Federal Reserve Bank of Minneapolis.
- David K. Backus & Patrick J. Kehoe, 1992. "International Evidence on the Historical Properties of Business Cycles," Working Papers 92-5, New York University, Leonard N. Stern School of Business, Department of Economics.
- Bankim Chadha & Eswar Prasad, 1993. "Interpreting the Cyclical Behavior of Prices," IMF Staff Papers, Palgrave Macmillan, vol. 40(2), pages 266-298, June.
- Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-472, June.
- Pakko, Michael R, 2000. "The Cyclical Relationship between Output and Prices: An Analysis in the Frequency Domain," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 382-399, August.
- 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.
- 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 789-797, August.
- John P. Judd & Bharat Trehan, 1993. "The cyclical behavior of prices: interpreting the evidence," Working Papers in Applied Economic Theory 93-14, Federal Reserve Bank of San Francisco.
- Floden, Martin, 2000. "Endogenous monetary policy and the business cycle," European Economic Review, Elsevier, vol. 44(8), pages 1409-1429, August. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:bsu:wpaper:200602. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Tung Liu)
If references are entirely missing, you can add them using this form.