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Cyclical Co-movement between Output, the Price Level, and Inflation

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Abstract

Over time, there has been a dramatic change in our understanding of the relationship between the price level and output over the business cycle. For several decades, the conventional wisdom maintained that the price level are procyclical. Arguably, the biggest development in our understanding came about because Lucas (1977) offered a transformative elegant definition of the business cycle itself. Armed with the definition that business cycles are deviations in output from trend, researchers applied new econometric techniques to re-consider key business-cycle facts. In this paper, we concentrate on two related sets of business-cycle facts. More specifically, we consider the contemporaneous correlation between the price level and output and between the inflation rate and output. Of course, the relationship between the price level and inflation is tautological; the inflation rate is the time derivative of the log of the price level. The existing evidence indicates a very interesting pair of observations; namely, that the price level is countercyclical and the inflation rate procyclical.

Suggested Citation

  • Joseph Haslag & Yu-Chin Hsu, 2012. "Cyclical Co-movement between Output, the Price Level, and Inflation," Working Papers 1203, Department of Economics, University of Missouri.
  • Handle: RePEc:umc:wpaper:1203
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    File URL: https://economics.missouri.edu/working-papers/2012/wp1203_haslag_hsu.pdf
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    References listed on IDEAS

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    1. Mankiw, N Gregory, 1989. "Real Business Cycles: A New Keynesian Perspective," Journal of Economic Perspectives, American Economic Association, vol. 3(3), pages 79-90, Summer.
    2. Ashley, R & Granger, C W J & Schmalensee, R, 1980. "Advertising and Aggregate Consumption: An Analysis of Causality," Econometrica, Econometric Society, vol. 48(5), pages 1149-1167, July.
    3. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 228-248, April.
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    Cited by:

    1. Joseph Haslag & William Brock, 2014. "On Understanding the Cyclical Behavior of the Price Level and Inflation," Working Papers 1404, Department of Economics, University of Missouri, revised 01 Jul 2014.
    2. Brock, William A. & Haslag, Joseph H., 2016. "A tale of two correlations: Evidence and theory regarding the phase shift between the price level and output," Journal of Economic Dynamics and Control, Elsevier, vol. 67(C), pages 40-57.
    3. Michal Andrle & Jan Bruha & Serhat Solmaz, 2013. "Inflation and Output Comovement in the Euro Area; Love at Second Sight?," IMF Working Papers 13/192, International Monetary Fund.

    More about this item

    Keywords

    business cycle; phase shifts; time-varying correlations; spectral analysis;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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