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Consumers, Consumer Prices and the Czech Business Cycle Identification

  • Jiri Podpiera

In this paper we propose an alternative method for deriving the business cycle. We interpret the varying inflationary responses to a constant demand shock in a partial equilibrium model. An above-average inflationary response indicates a boom phase and a below-average response shows an economic slowdown. Our model uses data for prices and household budget shares which are not subject to revisions and are consistent with the inflation measure. Hence, it mitigates the common drawbacks of usually applied techniques, such as real-time data mismeasurement or end-point bias of univariate filters. It follows that the results are altered neither by GDP data revisions, labor share determination and NAIRU estimation and total productivity smoothing, nor by the end-point bias of data filtering. The proposed method is thus preferred to other complementary methods such as GDP series filtering or the production function approach in showing truly the inflation environment. It is applied to the Czech quarterly data during 1994- 2003 and compared to other available business cycle estimates for the Czech economy. Comparing our business cycle estimation method with the production function method, used by the Economic Intelligence Unit and the Czech Ministry of Finance, and the Kalman filter, used by the Czech National Bank, we found the highest correlation between our measure and the Economic Intelligence Unit's indicator.

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Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2004/04.

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Date of creation: May 2004
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Handle: RePEc:cnb:wpaper:2004/04
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  1. Muellbauer, John, 1976. "Community Preferences and the Representative Consumer," Econometrica, Econometric Society, vol. 44(5), pages 979-99, September.
  2. Athanasios Orphanides & Simon van Norden, 1999. "The Reliability of Output Gap Estimates in Real Time," Macroeconomics 9907006, EconWPA.
  3. Michael Ehrmann and Frank Smets, 2001. "Uncertain Potential Output: Implications for Monetary Policy," Computing in Economics and Finance 2001 8, Society for Computational Economics.
  4. Paula De Masi, 1997. "IMF Estimates of Potential Output; Theory and Practice," IMF Working Papers 97/177, International Monetary Fund.
  5. Fuhrer, Jeffrey C, 1997. "The (Un)Importance of Forward-Looking Behavior in Price Specifications," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 338-50, August.
  6. Willman, Alpo, 2002. "Euro area production function and potential output: a supply side system approach," Working Paper Series 0153, European Central Bank.
  7. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc.
  8. Roberts, John M., 1997. "Is inflation sticky?," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 173-196, July.
  9. Paolo Guarda, 2002. "Potential output and the output gap in Luxembourg: some alternative methods," BCL working papers 4, Central Bank of Luxembourg.
  10. Argia M. Sbordone, 2001. "An Optimizing Model of U.S. Wage and Price Dynamics," Departmental Working Papers 200110, Rutgers University, Department of Economics.
  11. James Banks & Richard Blundell & Arthur Lewbel, 1997. "Quadratic Engel Curves And Consumer Demand," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 527-539, November.
  12. Claude Giorno & Pete Richardson & Deborah Roseveare & Paul van den Noord, 1995. "Estimating Potential Output, Output Gaps and Structural Budget Balances," OECD Economics Department Working Papers 152, OECD Publishing.
  13. Giordani, Paolo, 2000. "An alternative explanation of the price puzzle," SSE/EFI Working Paper Series in Economics and Finance 414, Stockholm School of Economics, revised 06 Dec 2000.
  14. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
  15. Muellbauer, John, 1975. "Aggregation, Income Distribution and Consumer Demand," Review of Economic Studies, Wiley Blackwell, vol. 42(4), pages 525-43, October.
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