The Price-Output Correlation and the Variance of Output

University of Alabama, Economics, Finance and Legal Studies Working Paper No. 07-07-01

29 Pages Posted: 9 Aug 2007

See all articles by James Peery Cover

James Peery Cover

University of Alabama - Department of Economics, Finance and Legal Studies

Paul Pecorino

University of Alabama - Department of Economics, Finance and Legal Studies

Date Written: July 2007

Abstract

Using data from Backus and Kehoe (1992) we establish the existence of a positive relationship between the price-output correlation and the variance of output. This is consistent with the idea that reductions in the magnitude of aggregate demand shocks have been the dominant cause of changes in the price-output correlation across countries and across time. By contrast, changes in the magnitude of aggregate supply shocks would impart a negative relationship between the price-output correlation and the variance of output. We also consider and rule out the possibility that a steepening of the aggregate supply curve is the cause of the negative price-output correlation in the postwar era. In the postwar period the variance of output and the price-output correlation both fell compared to the pre-WW II period. We argue that both these changes are likely the result of a more effective monetary policy.

Keywords: Price-Output Correlation, Variance of Output, Business Cycle

JEL Classification: E00

Suggested Citation

Cover, James Peery and Pecorino, Paul, The Price-Output Correlation and the Variance of Output (July 2007). University of Alabama, Economics, Finance and Legal Studies Working Paper No. 07-07-01, Available at SSRN: https://ssrn.com/abstract=1005246 or http://dx.doi.org/10.2139/ssrn.1005246

James Peery Cover

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States
205-348-8977 (Phone)
205-348-0590 (Fax)

Paul Pecorino (Contact Author)

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States
205-348-0379 (Phone)
205-348-0590 (Fax)

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