Cyclical Co-Movement Between Output, the Price-Level, and the Inflation Rate

In this chapter, we examine the relationship between the cyclical components of output, the price level and the inflation rate. During the post-war period, there is a negative correlation between output and the price level and a positive correlation between output and the inflation rate. A phase shift in the cyclical component between output and the price level can account for these two facts. The phase shift is consistent with movements in the price level Granger causes movements in output. In addition, we consider time-varying correlations between the two pairs of series. Spectral analysis suggest the price and output have different wavelengths, but the difference is not statistically significant.