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Are Prices Countercyclical?

Author

Listed:
  • Eswar S Prasad
  • Bankim Chadha

Abstract

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.

Suggested Citation

  • Eswar S Prasad & Bankim Chadha, 1992. "Are Prices Countercyclical?," IMF Working Papers 92/88, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:92/88
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    Citations

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    Cited by:

    1. Canova, Fabio & de Nicolo, Gianni, 2003. "On the sources of business cycles in the G-7," Journal of International Economics, Elsevier, vol. 59(1), pages 77-100, January.
    2. Rotemberg, Julio J., 1996. "Prices, output, and hours: An empirical analysis based on a sticky price model," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 505-533, June.
    3. Petr Duczynski, 2005. "On the Empirics of the Non-neutrality of Money: Evidence from Developed Countries," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 55(5-6), pages 267-282, May.
    4. Juan Carlos Parra Alvarez, 2008. "Hechos Estilizados de la Economía Colombiana:Fundamentos Empíricos para la Construcción y Evaluación de un Modelo DSGE," BORRADORES DE ECONOMIA 004602, BANCO DE LA REPÚBLICA.
    5. Pallage, Stephane & Robe, Michel A, 2001. "Foreign Aid and the Business Cycle," Review of International Economics, Wiley Blackwell, vol. 9(4), pages 641-672, November.
    6. Paul Cashin & Sam Ouliaris, 2004. "Key Features of Australian Business Cycles," Australian Economic Papers, Wiley Blackwell, vol. 43(1), pages 39-58, March.
    7. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
    8. Ioanna Konstantakopoulou & Eftymios Tsionas & Tryphon Kollintzas, 2009. "Stylized Facts of Prices and Interest Rates over the Business Cycle," Economics Bulletin, AccessEcon, vol. 29(4), pages 2613-2627.

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