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  4. July 2010
  5. Relative Goods' Prices, Pure Inflation, and the Phillips Correlation

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

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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)

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

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JEL Classification

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