On Understanding the Cyclical Behavior of the Price Level and Inflation

42 Pages Posted: 3 May 2014

See all articles by William A. Brock

William A. Brock

University of Wisconsin, Madison - Department of Economics; University of Missouri at Columbia - Department of Economics

Joseph Haslag

University of Missouri at Columbia - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 4, 2014

Abstract

In this paper, we examine the relationship between the price level and output and the inflation rate and output at business-cycle frequencies. In the first part of the paper, we develop a methodological approach to characterizing joint business cycle correlations. In particular, we are interested in providing a characterization of the frequency that a pair of correlation coefficients will occur. We apply this methodology to the contemporaneous correlation between the price level and output and between the inflation rate and output. We apply linear filters to the cyclical components, create a time series and compute the correlations. It is straightforward to construct histograms of the two correlation coefficients. In the second part, we specify a model economy with a form of rational inattention. In this setting, we perform numerical simulations to determine if the model economy can generate correlations quantitatively similar to those observed in the data. It can.

Keywords: countercyclical price level, acyclical inflation, phase shift, model uncertainty

JEL Classification: C82, E31, E32

Suggested Citation

Brock, William A. and Haslag, Joseph, On Understanding the Cyclical Behavior of the Price Level and Inflation (March 4, 2014). Available at SSRN: https://ssrn.com/abstract=2431826 or http://dx.doi.org/10.2139/ssrn.2431826

William A. Brock

University of Wisconsin, Madison - Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706
United States
608-263-6655 (Phone)
608-263-3876 (Fax)

University of Missouri at Columbia - Department of Economics ( email )

118 Professional Building
Columbia, MO 65211
United States

Joseph Haslag (Contact Author)

University of Missouri at Columbia - Department of Economics ( email )

118 Professional Building
Columbia, MO 65211
United States

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