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American Economic Journal: Macroeconomics: Vol. 2 No. 3 (July 2010)

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

Article Citation

Reis, Ricardo, and Mark W. Watson. 2010. "Relative Goods' Prices, Pure Inflation, and the Phillips Correlation." American Economic Journal: Macroeconomics, 2(3): 128-57.

DOI: 10.1257/mac.2.3.128

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 relative-price 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 answer two 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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Authors

Reis, Ricardo (Columbia U)
Watson, Mark W. (Princeton U)

JEL Classifications

E21: Macroeconomics: Consumption; Saving; Wealth
E23: Macroeconomics: Production
E31: Price Level; Inflation; Deflation
E52: Monetary Policy

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