Why Did the Sign of the Price-Output Correlation Change? Evidence from a Structural VAR with GARCH Errors

James Cover and C. Hueng

No 200602, Working Papers from Ball State University, Department of Economics

Abstract: It is generally agreed that the price-output correlation in the United States was positive prior to the Second World War, but became negative during the postwar period (at least by 1972). This paper offers evidence that the price-output correlation changed signs because of a decrease in the variability of aggregate demand. A structural VAR with bivariate GARCH (1,1) errors is used to estimate a times series of price-output correlations as well as of the conditional variances of the structural shocks to AD and AS. It is found that during the postwar period the price-output correlation is negative and significantly different from zero only when the standard deviation of the AD shock is less than that of the AS shock.

Keywords: Price-Output Correlation; Structural VAR; Supply and Demand Shocks; Blanchard-Quah Decomposition (search for similar items in EconPapers)
JEL-codes: C32 E3 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2006-03, Revised 2006-03
New Economics Papers: this item is included in nep-cba, nep-ets and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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