Working Paper: NBER ID: w8195
Authors: Wouter J. Den Haan; Steven Sumner
Abstract: In this paper, we study the short-run and long-run comovement between prices and real activity in the G7 countries during the postwar period using VAR forecast errors and frequency domain filters. We find that there are several patterns of the correlation coefficients that are the same in all countries. In particular, the correlation at the 'long-run' horizon is virtually always negative and the correlation at the 'short-run' horizon is typically substantially higher. Although there is evidence of positive 'short-run' correlations for some countries it is not very robust to the choice of the price and output variables. In addition, we propose a more efficient method to calculate the covariances of VAR forecast errors and - in contrast to claims made in the literature - we show that band-pass filters isolate the desired set of frequencies not only when the series are stationary but also when they are first or second-order integrated processes.
Keywords: macroeconomics; price-output correlation; G7 countries; VAR analysis; frequency domain filters
JEL Codes: E32; E37
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Long-run correlations between prices and output (E39) | significantly negative (C29) |
| Short-run correlations between prices and output (E39) | variability in correlations (C10) |
| specific economic context or measurement methods (E01) | variability in correlations (C10) |
| Negative correlation of VAR forecast errors (C22) | cannot be explained by models based on demand shocks (E19) |
| Theories incorporating procyclical prices (E39) | unlikely to represent postwar business cycle fluctuations (E32) |