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The Correlation between Shocks to Output and the Price Level: Evidence from a Multivariate GARCH Model
Author(s) -
Cover James Peery,
Hueng C. James
Publication year - 2003
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.1002/j.2325-8012.2003.tb00556.x
Subject(s) - bivariate analysis , autoregressive model , heteroscedasticity , econometrics , autoregressive conditional heteroskedasticity , correlation , sign (mathematics) , economics , vector autoregression , recession , mathematics , autocorrelation , statistics , volatility (finance) , keynesian economics , mathematical analysis , geometry
Previous research indicates that the price‐output correlation is time varying. This paper therefore estimates a vector autoregression (VAR) model with a bivariate generalized autoregressive conditional heteroskedasticity (GARCH) error process to obtain quarterly estimates of the price‐output correlation for the United States for the period 1876:IV‐1999:IV. The estimated correlation is usually positive before 1945 and zero during 1945‐1963. Negative correlations become important only after 1963 but do not become obviously more important than zero correlations. Prior to 1945, the estimated correlation typically is positive during both recessions and expansions. After 1945, the estimated correlation remains largely positive during recessions but becomes mainly negative during expansions, suggesting that changes in the sign of the price‐output correlation are the result primarily of changes in its sign during expansions.