Finance and Economics Discussion Series (FEDS)
June 2023
Inflation and Real Activity over the Business Cycle
Francesco Bianchi, Giovanni Nicolò, Dongho Song
Abstract:
We study the relation between inflation and real activity over the business cycle. We employ a Trend-Cycle VAR model to control for low-frequency movements in inflation, unemployment, and growth that are pervasive in the post-WWII period. We show that cyclical fluctuations of inflation are related to cyclical movements in real activity and unemployment, in line with what is implied by the New Keynesian framework. We then discuss the reasons for which our results relying on a Trend-Cycle VAR differ from the findings of previous studies based on VAR analysis. We explain empirically and theoretically how to reconcile these differences.
Keywords: Inflation, real activity, business cycles, trend-cycle VAR
DOI: https://doi.org/10.17016/FEDS.2023.038
PDF: Full Paper
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