Discussion Paper Details

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Title: Product Prices and the OECD Cycle

Author(s): Aart Kraay and Jaume Ventura

Publication Date: October 2001

Keyword(s): commodity trade, international Transmission of shocks and OECD Cycle

Programme Area(s): International Macroeconomics

Abstract: It is well known that business cycles in OECD countries exhibit a remarkable degree of synchronization. Much less known is that the peak of the OECD cycle is associated with high prices of labour-intensive products and low prices of capital-intensive ones. We document this cyclical behaviour of product prices and argue that it offers an important clue as to why business cycles are so synchronized. Positive shocks in one or more countries raise the prices of labour-intensive products and, as a result, the demand for labour throughout the industrialized world. This generates increases in wages, employment and output in all industrial countries. Through this channel, shocks are positively transmitted across countries, creating a force towards the synchronization of business cycles.

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Bibliographic Reference

Kraay, A and Ventura, J. 2001. 'Product Prices and the OECD Cycle'. London, Centre for Economic Policy Research.