Skip to main content

Advertisement

SpringerLink
Log in

The Comovement Between Forecast Errors for Real GDP and Its Deflator in Six OECD Countries: Did Supply Shocks Become Less Dominant During the Great Moderation?

  • Research Paper
  • Published:
Journal of Business Cycle Research Aims and scope Submit manuscript

Abstract

A negative correlation between forecast errors of the price level and real output is evidence that prices are countercyclical and so evidence for the dominance of supply shocks. We examine the correlation between the forecast errors of real GDP and its deflator for six OECD countries. With the exceptions of the United Kingdom and the United States, previous research used errors from an Index of Industrial Production and the Consumer Price Index. Using real GDP and the GDP deflator, the patterns of correlations over forecast horizons for Canada, France, Italy, and Japan do not match closely with that of either the UK or the US. Using a longer sample than previous studies we find evidence that the correlations are greater and often positive after 1981 indicating diminished dominance of supply shocks. This decrease is associated with decreases in both the relative frequency and relative size of the negative products of the forecast errors.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6
Fig. 7
Fig. 8
Fig. 9
Fig. 10
Fig. 11
Fig. 12
Fig. 13
Fig. 14
Fig. 15
Fig. 16
Fig. 17
Fig. 18

Similar content being viewed by others

Notes

  1. Mills (1927 and 1946) and Burns and Mitchell (1946) found evidence that the prices of many commodities tended to rise during expansions and fall during recessions. Kydland and Prescott (1990) and Cooley and Ohanian (1991) find a positive correlation between detrended values of price and output. Rottemberg (1996) and Davis and Kanago (2002) look at the correlation between forecast errors but only at a horizon of one.

  2. The corresponding author will provide a spreadsheet with the products of the forecast errors for all horizons and all countries upon request.

  3. A reviewer suggested also looking at 2008 as a breakpoint because at about that time central banks moved policy rates towards and kept them at or near the zero lower bound for some time. However, given quarterly data a break at a date this close to the end of the sample leaves a small number of forecast errors for computing correlations. If the sample used to make forecasts begins in 2008, the number of forecast errors diminishes as the time horizon rises as errors at longer forecast horizons would not be available at the start of the sample.

References

  • Burns, A. F., & Mitchell, W. C. (1946). Measuring Business Cycles. National Bureau of Economic Research.

    Google Scholar 

  • Cassou, S. P., & Vázquez, J. (2014). Small-scale New Keynesian Model Features that Can Reproduce Lead, Lag And Persistence Patterns. The BE Journal of Macroeconomics, 14(1), 267–300.

    Google Scholar 

  • Cooley, T. F., & Ohanian, L. E. (1991). The Cyclical Behavior of Prices. Journal of Monetary Economics, 28(1), 25–60.

    Article  Google Scholar 

  • Davis, G. K., & Kanago, B. E. (2002). The Contemporaneous Correlation Between Price Shocks and Output Shocks. Applied Economics, 34(18), 2333–2339.

    Article  Google Scholar 

  • Davis, G. K., & Kanago, B. E. (2008). The Cyclical Behavior of Prices and Relative Prices. Economic Inquiry, 46(4), 576–586.

    Article  Google Scholar 

  • Den Haan, W. J. (2000). The Comovement Between Output and Prices. Journal of Monetary Economics, 46(1), 3–30.

    Article  Google Scholar 

  • Den Haan, W. J., & Sumner, S. W. (2004). The Comovement Between Real Activity and Prices in The G7. European Economic Review, 48(6), 1333–1347.

    Article  Google Scholar 

  • Hall, T. E. (1995). Price Cyclicality in the Natural Rate-Nominal Demand Shock Model. Journal of Macroeconomics, 17(2), 257–272.

    Article  Google Scholar 

  • Judd, J. P., & Bharat, T. (1995). The Cyclical Behavior of Prices: Interpreting the Evidence. Journal of Money, Credit, and Banking, 27(3), 789–797.

    Article  Google Scholar 

  • Kydland, F. E., & Prescott, E. C. (1990). Business Cycles: Real Facts and a Monetary Myth. Federal Reserve Bank of Minneapolis Quarterly Review, 14(2), 3–18.

    Google Scholar 

  • María-Dolores, R., & Vázquez, J. (2008). The New Keynesian Monetary Model: Does it Show the Comovement Between GDP and Inflation In The US? Journal of Economic Dynamics and Control, 32(5), 1466–1488.

    Article  Google Scholar 

  • Mills, F. C. (1927). The Behavior of Prices. National Bureau of Economic Research.

    Google Scholar 

  • Mills, F. C. (1946). Price-Quantity Interactions in the Business Cycle. National Bureau of Economic Research.

    Google Scholar 

  • Rotemberg, J. J. (1996). Prices, Output, and Hours: An Empirical Analysis Based on a Sticky Price Model. Journal of Monetary Economics, 37(3), 505–533.

    Article  Google Scholar 

  • Schreft, S. L. (1990). Credit Controls: 1980. FRB Richmond Economic Review, 76(6), 25–55.

    Google Scholar 

  • Stock, J. H., & Watson, M. W. (2002). Has the Business Cycle Changed and Why? NBER Macroeconomics Annual, 17, 159–218.

    Article  Google Scholar 

  • Summers, P. M. (2005). What Caused the Great Moderation? Some Cross-Country Evidence. Economic Review-Federal Reserve Bank of Kansas City, 90(3), 5.

    Google Scholar 

  • Vázquez, J. (2002). The Co-Movement Between Output and Prices in the EU15 Countries: An Empirical Investigation. Applied Economics Letters, 9(14), 957–966.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Economics, University of Northern Iowa, 1227 West 27Th Street, Cedar Falls, Iowa, USA

    Bryce Kanago

Authors
  1. Bryce Kanago
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Bryce Kanago.

Ethics declarations

Conflict of interest

The author declares he has no conflict of interest.

Human Participants or Animals

The author declares that this study did not involve participation of human participants or animals.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Appendix: A Results for Bivariate VAR Models

Appendix: A Results for Bivariate VAR Models

See Figs.

Fig. 19
figure 19

Correlations from bivariate VAR for Canada

Full size image

19,

Fig. 20
figure 20

Correlations from bivariate VAR model for France

Full size image

20,

Fig. 21
figure 21

Correlations from bivariate VAR model for Italy

Full size image

21,

Fig. 22
figure 22

Correlations from bivariate VAR model for Japan

Full size image

22,

Fig. 23
figure 23

Correlations from bivariate VAR model for UK

Full size image

23,

Fig. 24
figure 24

Correlations from bivariate VAR model for US

Full size image

24.

Rights and permissions

Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Kanago, B. The Comovement Between Forecast Errors for Real GDP and Its Deflator in Six OECD Countries: Did Supply Shocks Become Less Dominant During the Great Moderation?. J Bus Cycle Res 19, 149–169 (2023). https://doi.org/10.1007/s41549-023-00086-0

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s41549-023-00086-0

Keywords

JEL Classification

Search

Navigation