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Why Did the Sign of the Price-Output Correlation Change? Evidence from a Structural VAR with GARCH Errors


  • James Peery Cover

    () (Department of Economics, Finance & Legal Studies, University of Alabama)

  • C. James Hueng

    () (Department of Economics, Western Michigan University)


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.

Suggested Citation

  • James Peery Cover & C. James Hueng, 2006. "Why Did the Sign of the Price-Output Correlation Change? Evidence from a Structural VAR with GARCH Errors," Working Papers 200602, Ball State University, Department of Economics, revised Mar 2006.
  • Handle: RePEc:bsu:wpaper:200602

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    References listed on IDEAS

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    More about this item


    Price-Output Correlation; Structural VAR; Supply and Demand Shocks; Blanchard-Quah Decomposition;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • 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

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