Output and Inflation Co-movement: An Update on Business-Cycle Stylized Facts

By Michal Andrle, Jan Bruha, Serhat Solmaz

December 13, 2016

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Format: Chicago

Michal Andrle, Jan Bruha, and Serhat Solmaz. Output and Inflation Co-movement: An Update on Business-Cycle Stylized Facts, (USA: International Monetary Fund, 2016) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

What are the drivers of business cycle fluctuations? And how many are there? By documenting strong and predictable co-movement of real variables during the business cycle in a sample of advanced economies, we argue that most business cycle fluctuations are driven by one major factor. The positive co-movement of real output and inflation convincingly argues for a demand story. We propose a simple statistic that can compare data and models. Based on this statistic, we show that the recent vintage of structural economic models has difficulties replicating the stylized facts we document.

Subject: Business cycles, Econometric analysis, Econometric models, Economic growth, Financial services, Inflation, Inflation targeting, Monetary policy, Prices, Short term interest rates

Keywords: Business cycle, Business cycle frequency, Business cycles, Demand shock, Demand shocks, DSGE models, Dynamic principal components, Econometric models, Inflation, Inflation cycle, Inflation dynamics, Inflation expectation, Inflation gap, Inflation targeting, Short term interest rates, WP

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/241
Stock No:

WPIEA2016241
ISBN:

9781475560329
ISSN:

1018-5941

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