IMF Working Papers

Are Prices Countercyclical?

Author/Editor:

Eswar S Prasad ; Bankim Chadha

Publication Date:

October 1, 1992

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.

Series:

Working Paper No. 1992/088

Subject:

Business cycles Economic growth Economic theory Inflation Prices Sticky prices Supply shocks

Notes:

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