Investigating a countercyclical price level with procyclical inflation

Abstract

[ACCESS RESTRICTED TO THE UNIVERSITY OF MISSOURI AT AUTHOR'S REQUEST.] Recent work of the last 15 years has sought to revaluate what are often thought of as consistent business cycle facts, and one of these in particular is that of procyclical prices. Several publications have found empirical evidence that, counter to widespread acceptance, this cycle fact is not always true, and in the post World War II era prices have indeed been countercyclical. It is the goal of this work to replicate this finding in a set of simulated time series while also keeping inflation procyclical. Furthermore, the simulations show that this occurrence can be produced by moving the simulated time series of the price level out of phase with the output time series. This resulting phase difference can then be adapted to an empirical time frame as a number of quarters that the price level leads output. This process involves calibrating the representative output cycle length in the simulation with a representative output cycle length in empirical data. The conclusion of this study provides a link between the correlation of output and the price level with the phase difference between the cycles of the two variables. Future models could seek to explain this phase difference or operate within the partition suggested in these results.