Are Prices Countercyclical?

IMF Working Papers, October 1, 1992

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Are Prices Countercyclical?

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Bibliographic details

• Authors: Eswar S Prasad, Bankim Chadha
• Published: October 1, 1992
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451851076.001

Objective and methodological critique

• Examines the comovement of prices with the cyclical component of output.
• Argues that applying the same stationarity-inducing transformation to the levels of both output and prices and then examining correlations of the resulting series can be misleading.
• Recommends a more appropriate procedure: examine the correlations between the rate of inflation and the level of the cyclical component of output.

Empirical findings (post-war U.S. data)

• Correlations between similarly transformed price and output data are consistently and often strongly negative; these negative correlations have been reported by a number of authors as evidence of countercyclical price behavior.
• The rate of inflation is consistently and usually strongly positively correlated with various measures of the cyclical component of output.

Key concepts and variables emphasized

• rate of inflation
• cyclical component of output (level)
• similarly transformed price and output series (stationarity-inducing transformations)
• aggregate demand, aggregate price level, demand-shift term, supply-shift term, equilibrium inflation rate, responsiveness parameter, sticky prices, supply shocks

Publication metadata and identifiers

• Authors: Eswar S Prasad, Bankim Chadha
• Date: October 1, 1992
• Series: Working Paper No. 1992/088
• Issue: 088
• Volume: 1992
• Pages: 37
• DOI: https://doi.org/10.5089/9781451851076.001
• Stock No: WPIEA0881992
• ISBN: 9781451851076
• ISSN: 1018-5941

IMF Working Papers — Are Prices Countercyclical?