Output and Inflation Co-movement: An Update on Business-Cycle Stylized Facts

Michal Andrle, Jan Bruha and Serhat Solmaz

No 2016/241, IMF Working Papers from International Monetary Fund

Abstract: What are the drivers of business cycle fluctuations? And how many are there? By documenting strong and predictable co-movement of real variables during the business cycle in a sample of advanced economies, we argue that most business cycle fluctuations are driven by one major factor. The positive co-movement of real output and inflation convincingly argues for a demand story. We propose a simple statistic that can compare data and models. Based on this statistic, we show that the recent vintage of structural economic models has difficulties replicating the stylized facts we document.

Keywords: WP; business cycle frequency; inflation expectation; demand shock; Business cycle; demand shocks; DSGE models; dynamic principal components; inflation cycle; inflation gap; inflation dynamics; Inflation; Business cycles; Inflation targeting; Econometric models; Short term interest rates (search for similar items in EconPapers)
Pages: 37
Date: 2016-12-13
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Citations: View citations in EconPapers (6)

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