Relative Goods? Prices and Pure Inflation

Mark Watson
Authors registered in the RePEc Author Service: Ricardo Reis

No 6593, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper uses a dynamic factor model for the quarterly changes in consumption goods? prices to separate them into three components: idiosyncratic relative-price changes, aggregate relative-price changes, and changes in the unit of account. The model identifies a measure of ?pure? inflation: the common component in goods? inflation rates that has an equiproportional effect on all prices and is uncorrelated with relative price changes at all dates. The estimates of pure inflation and of the aggregate relative-price components allow us to re-examine three classic macro-correlations. First, we find that pure inflation accounts for 15-20% of the variability in overall inflation, so that most changes in inflation are associated with changes in goods? relative prices. Second, we find that the Phillips correlation between inflation and measures of real activity essentially disappears once we control for goods? relative-price changes. Third, we find that, at business-cycle frequencies, the correlation between inflation and money is close to zero, while the correlation with nominal interest rates is around 0.5, confirming previous findings on the link between monetary policy and inflation

Keywords: Dynamic factor models; inflation; Phillips relation; Relative prices (search for similar items in EconPapers)
JEL-codes: C32 C43 E31 (search for similar items in EconPapers)
Date: 2007-12
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: Add references at CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://cepr.org/publications/DP6593 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:6593

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP6593

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().