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Title: The Comovements between Real Activity and Prices in the G7

Author(s): Wouter Den Haan and Steven Sumner

Publication Date: May 2001

Keyword(s): Covariance, Filters and Vector Autoregressive Models

Programme Area(s): International Macroeconomics

Abstract: In this Paper, we study the short-run and long-run comovement between prices and real activity in the G7 countries during the postwar period using VAR forecast errors and frequency domain filters. We find that there are several patterns of the correlation coefficients that are the same in all countries. In particular, the correlation at the ?long-run? horizon is virtually always negative and the correlation at the ?short-run? horizon is typically substantially higher. Although there is evidence of positive ?short-run? correlations for some countries it is not very robust to the choice of the price and output variables. In addition, we propose a more efficient method to calculate the covariances of VAR forecast errors and - in contrast to claims made in the literature - we show that band-pass filters isolate the desired set of frequencies not only when the series are stationary but also when they are first or second-order integrated processes.

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Bibliographic Reference

Den Haan, W and Sumner, S. 2001. 'The Comovements between Real Activity and Prices in the G7'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2801