Re-examining the cyclical behaviour of prices and output

Re-Examining the Cyclical Behaviour of Prices and Output. - Recent studies have suggested that prices are not predominantly procyclical and that estimates of negative correlations provide substantially more support for ''real'' or supply-side interpretations than for ''nominal'' or demand-side interpretations of business cycles. This paper re-examines the implications of macroeconomic theory for prices and output and provides an alternative interpretation of the empirical results. The main conclusions are: (i) the correlations, when taken at face value, identify the presence of only temporary supply and demand shocks which is inconsistent with the postwar experience of sustained inflation; (ii) demand-induced business cycles can very well deliver time-varying and negative price-output correlations.