Relative Goods' Prices, Pure Inflation, and The Phillips Correlation

Ricardo Reis; Mark W. Watson

doi:10.1257/mac.2.3.128

Relative Goods' Prices, Pure Inflation, and The Phillips Correlation

Ricardo Reis, Mark W. Watson

Research output: Contribution to journal › Article › peer-review

67 Scopus citations

Abstract

This paper uses a dynamic factor model for the quarterly changes in consumption goods' prices in the United States since 1959 to separate them into three independent components: idiosyncratic relativeprice changes, a low-dimensional index of aggregate relative-price changes, and an index of equiproportional changes in all inflation rates that we label "pure" inflation. We use the estimates to answertwo questions. First, what share of the variability of inflation is associated with each component, and how are they related to conventional measures of monetary policy and relative-price shocks? Second, what drives the Phillips correlation between inflation and measures of real activity? (JEL E21, E23, E31, E52).

Original language	English (US)
Pages (from-to)	128-157
Number of pages	30
Journal	American Economic Journal: Macroeconomics
Volume	2
Issue number	3
DOIs	https://doi.org/10.1257/mac.2.3.128
State	Published - Jul 1 2010

All Science Journal Classification (ASJC) codes

General Economics, Econometrics and Finance

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10.1257/mac.2.3.128

Cite this

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title = "Relative Goods' Prices, Pure Inflation, and The Phillips Correlation",

abstract = "This paper uses a dynamic factor model for the quarterly changes in consumption goods' prices in the United States since 1959 to separate them into three independent components: idiosyncratic relativeprice changes, a low-dimensional index of aggregate relative-price changes, and an index of equiproportional changes in all inflation rates that we label {"}pure{"} inflation. We use the estimates to answertwo questions. First, what share of the variability of inflation is associated with each component, and how are they related to conventional measures of monetary policy and relative-price shocks? Second, what drives the Phillips correlation between inflation and measures of real activity? (JEL E21, E23, E31, E52).",

author = "Ricardo Reis and Watson, {Mark W.}",

note = "Funding Information: We are grateful to several colleagues for their valuable input to this research project. For their support and hospitality, Reis thanks the Hoover Institution at Stanford University under a Campbell national fellowship, Columbia University's Program for Economic Research, the University of Chicago, and Princeton University where much of the work for this paper was completed. The National Science Foundation provided support through grants SES-0617811 and SES-0921147.",

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N2 - This paper uses a dynamic factor model for the quarterly changes in consumption goods' prices in the United States since 1959 to separate them into three independent components: idiosyncratic relativeprice changes, a low-dimensional index of aggregate relative-price changes, and an index of equiproportional changes in all inflation rates that we label "pure" inflation. We use the estimates to answertwo questions. First, what share of the variability of inflation is associated with each component, and how are they related to conventional measures of monetary policy and relative-price shocks? Second, what drives the Phillips correlation between inflation and measures of real activity? (JEL E21, E23, E31, E52).

AB - This paper uses a dynamic factor model for the quarterly changes in consumption goods' prices in the United States since 1959 to separate them into three independent components: idiosyncratic relativeprice changes, a low-dimensional index of aggregate relative-price changes, and an index of equiproportional changes in all inflation rates that we label "pure" inflation. We use the estimates to answertwo questions. First, what share of the variability of inflation is associated with each component, and how are they related to conventional measures of monetary policy and relative-price shocks? Second, what drives the Phillips correlation between inflation and measures of real activity? (JEL E21, E23, E31, E52).

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Relative Goods' Prices, Pure Inflation, and The Phillips Correlation

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