Are Prices Countercyclical?

October 1, 1992

Preview Citation

Format: Chicago

Eswar S Prasad, and Bankim Chadha. Are Prices Countercyclical?, (USA: International Monetary Fund, 1992) accessed November 23, 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

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.

Subject: Business cycles, Economic growth, Economic theory, Inflation, Prices, Sticky prices, Supply shocks

Keywords: Aggregate demand, Aggregate price level, Business cycles, Countercyclical price behavior, Demand-shift term, Equilibrium inflation rate, Inflation, Price movement, Price series, Rate of inflation, Responsiveness parameter, Sticky prices, Supply shift-term, Supply shocks, Supply-shift term, WP

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1992/088
Stock No:

WPIEA0881992
ISBN:

9781451851076
ISSN:

1018-5941

Notes

Study on output and prices in the post-war United States. Also published in Staff Papers, Vol. 40, No. 2, June 1993.

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