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The cyclical relationship between output and prices: an analysis in the frequency domain

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  • Michael R. Pakko

Abstract

Recent research showing negative correlations between detrended output and prices during the postwar period has brought into question the conventional wisdom that prices are procyclical. However, this finding has been shown to be sensitive to the sample period considered. This paper examines the relationship between output and prices in the frequency domain: using quarterly data on GNP and the deflator for the period 1875-1994, the covariance of output and prices is decomposed into its spectral components in order to investigate whether the differences in the price-output relationship across sample periods reflect changes in the importance of various frequencies within the correlations, or whether they reflect more fundamental changes in the entire spectral relationship.

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  • 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.
    • Handle: RePEc:fip:fedlwp:1997-007
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    2. William T. Gavin & Finn E. Kydland, 2000. "The nominal facts and the October 1979 policy change," Review, Federal Reserve Bank of St. Louis, vol. 82(Nov), pages 39-61.
    3. 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.
    4. Ching-Chih Chang & Chin-Yuan Hsieh & Yung-Chih Lin, 2012. "A predictive model of the freight rate of the international market in Capesize dry bulk carriers," Applied Economics Letters, Taylor & Francis Journals, vol. 19(4), pages 313-317, March.
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    6. 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, John Wiley & Sons, vol. 70(1), pages 75-92, July.
    7. Robert J. Gordon, 2011. "The History of the Phillips Curve: Consensus and Bifurcation," Economica, London School of Economics and Political Science, vol. 78(309), pages 10-50, January.
    8. Mallick, Debdulal, 2014. "A Spectral Representation of the Phillips Curve in Australia," MPRA Paper 59794, University Library of Munich, Germany.
    9. David Gray, 2015. "Hidden Properties of Irish House Price Vintages," Housing Studies, Taylor & Francis Journals, vol. 30(8), pages 1317-1353, November.
    10. William T. Gavin & Finn E. Kydland, 1999. "Endogenous Money Supply and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(2), pages 347-369, April.
    11. Gatti, Domenico Delli & Gallegati, Marco & Gallegati, Mauro, 2005. "On the nature and causes of business fluctuations in Italy, 1861-2000," Explorations in Economic History, Elsevier, vol. 42(1), pages 81-100, January.
    12. Feng Zhu, 2005. "The fragility of the Phillips curve: A bumpy ride in the frequency domain," BIS Working Papers 183, Bank for International Settlements.
    13. 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.
    14. 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.
    15. 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.
    16. Corrado, Luisa & Rossi, Isolina, 2019. "Anatomy of credit-less recoveries," Journal of Macroeconomics, Elsevier, vol. 62(C).
    17. Gerba, Eddie, 2015. "Have the US macro-financial linkages changed? The balance sheet dimension," LSE Research Online Documents on Economics 59886, London School of Economics and Political Science, LSE Library.
    18. George Davis & Bryce Kanago, 2002. "The contemporaneous correlation between price shocks and output shocks," Applied Economics, Taylor & Francis Journals, vol. 34(18), pages 2333-2339.
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    20. David Gray & Caroline Elliott, 2015. "Are prices of New dwellings different? A spectral analysis of UK property vintages," Cogent Economics & Finance, Taylor & Francis Journals, vol. 3(1), pages 993860-9938, December.

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