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Are Prices Countercyclical?

  • Eswar Prasad
  • Bankim Chadha

This paper examines the comovement of prices with the cyclical component of output. It argues that determining the cyclical behavior of prices by applying the same stationarity-inducing transformation to the levels of both output and prices, and examining the correlations of the resulting series, can be misleading. A more appropriate procedure is to examine the correlations between the rate of inflation and the level of the cyclical component of output. In post-war U.S. data the correlations between similarly transformed price and output data are consistently and often strongly negative, as reported recently by a number of authors as evidence of countercyclical price behavior. The rate of inflation, however, is consistently and usually strongly positively correlated with various measures of the cyclical component of output.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 92/88.

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Length: 37
Date of creation: 01 Oct 1992
Date of revision:
Handle: RePEc:imf:imfwpa:92/88
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