Interpreting the Cyclical Behavior of Prices

Bankim Chadha and Eswar Prasad
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Bankim Chadha: International Monetary Fund

IMF Staff Papers, 1993, vol. 40, issue 2, 266-298

Abstract: This paper 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 postwar U.S. data, the correlations between similarly transformed price and output data are consistently and often strongly negative. The rate of inflation, however, is consistently and usually strongly positively correlated with various measures of the cyclical component of output.

JEL-codes: E31 E32 (search for similar items in EconPapers)
Date: 1993
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