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On Understanding the Cyclical Behavior of the Price Level and Inflation

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Abstract

In this paper, we examine the relationship between the price level and output and the inflation rate and output at business-cycle frequencies. In the first part of the paper, we develop a methodological approach to characterizing joint business cycle correlations. In particular, we are interested in providing a characterization of the frequency that a pair of correlation coefficients will occur. We apply this methodology to the contemporaneous correlation between the price level and output and between the inflation rate and output. We apply linear filters to the cyclical components, create a time series and compute the correlations. It is straightforward to construct histograms of the two correlation co-efficients. In the second part, we specify a model economy with a form of rational inattention. In this setting, we perform numerical simulations to determine if the model economy can generate correlations quantitatively similar to those observed in the data. It can.

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  • 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.
    • Handle: RePEc:umc:wpaper:1404
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    Cited by:

    1. Guglielmo Maria Caporale & Gloria Claudio-Quiroga & Luis Alberiko Gil-Alana, 2022. "The relationship between prices and output in the UK and the US," SN Business & Economics, Springer, vol. 2(6), pages 1-13, June.
    2. Antonakakis, Nikolaos & Gupta, Rangan & Tiwari, Aviral K., 2017. "The time-varying correlation between output and prices in the United States over the period 1800–2014," Economic Systems, Elsevier, vol. 41(1), pages 98-108.
    3. 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.

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    More about this item

    Keywords

    countercyclical price level; acyclical inflation; phase shift; model uncertainty;
    All these keywords.

    JEL classification:

    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
    • 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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