IDEAS home Printed from https://ideas.repec.org/a/aea/aejmac/v2y2010i3p128-57.html
   My bibliography  Save this article

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

Author

Listed:
  • Ricardo Reis
  • Mark W. Watson

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)

Suggested Citation

  • Ricardo Reis & Mark W. Watson, 2010. "Relative Goods' Prices, Pure Inflation, and the Phillips Correlation," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(3), pages 128-157, July.
    • Handle: RePEc:aea:aejmac:v:2:y:2010:i:3:p:128-57
    Note: DOI: 10.1257/mac.2.3.128
    as

    Download full text from publisher

    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/mac.2.3.128
    Download Restriction: no
    File URL: http://www.aeaweb.org/aej/mac/data/2009-0013_data.zip
    Download Restriction: no
    File URL: http://www.aeaweb.org/aej/mac/app/2008-0016_app.pdf
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Stock, James H. & Watson, Mark W., 1999. "Business cycle fluctuations in us macroeconomic time series," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 1, pages 3-64, Elsevier.
    2. Michael F. Bryan & Stephen G. Cecchetti, 1993. "The consumer price index as a measure of inflation," Economic Review, Federal Reserve Bank of Cleveland, vol. 29(Q IV), pages 15-24.
    3. Michael F. Bryan & Stephen G. Cecchetti & Rodney L. Wiggins, 1997. "Efficient inflation estimation," Working Papers (Old Series) 9707, Federal Reserve Bank of Cleveland.
    4. Catherine Doz & Domenico Giannone & Lucrezia Reichlin, 2012. "A Quasi–Maximum Likelihood Approach for Large, Approximate Dynamic Factor Models," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 1014-1024, November.
    5. Reichlin, Lucrezia & Forni, Mario & Cristadoro, Riccardo & Veronese, Giovanni, 2001. "A Core Inflation Index for the Euro Area," CEPR Discussion Papers 3097, C.E.P.R. Discussion Papers.
    6. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(4), pages 1295-1328.
    7. Ricardo Reis & Mark W. Watson, 2007. "Measuring Changes in the Value of the Numeraire," Working Papers 2007-7, Princeton University. Economics Department..
    8. James H. Stock & Mark W. Watson, 1993. "Business Cycles, Indicators, and Forecasting," NBER Books, National Bureau of Economic Research, Inc, number stoc93-1.
    9. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January.
    10. A. W. Phillips, 1958. "The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861–1957," Economica, London School of Economics and Political Science, vol. 25(100), pages 283-299, November.
    11. Bai, Jushan & Ng, Serena, 2007. "Determining the Number of Primitive Shocks in Factor Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 52-60, January.
    12. James H. Stock & Mark W. Watson, 2005. "Implications of Dynamic Factor Models for VAR Analysis," NBER Working Papers 11467, National Bureau of Economic Research, Inc.
    13. Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2000. "The Generalized Dynamic-Factor Model: Identification And Estimation," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 540-554, November.
    14. Mishkin, Frederic S., 1992. "Is the Fisher effect for real? : A reexamination of the relationship between inflation and interest rates," Journal of Monetary Economics, Elsevier, vol. 30(2), pages 195-215, November.
    15. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    16. Amengual, Dante & Watson, Mark W., 2007. "Consistent Estimation of the Number of Dynamic Factors in a Large N and T Panel," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 91-96, January.
    17. Marlene Amstad & Simon M. Potter, 2009. "Real time underlying inflation gauges for monetary policymakers," Staff Reports 420, Federal Reserve Bank of New York.
    18. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2005. "Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(1), pages 387-422.
    19. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1.
    20. Michael F. Bryan & Stephen G. Cecchetti & Roisin O'Sullivan, 2002. "Asset Prices in the Measurement of Inflation," NBER Working Papers 8700, National Bureau of Economic Research, Inc.
    21. Stock J.H. & Watson M.W., 2002. "Forecasting Using Principal Components From a Large Number of Predictors," Journal of the American Statistical Association, American Statistical Association, vol. 97, pages 1167-1179, December.
    22. Watson, Mark W., 1989. "Recursive solution methods for dynamic linear rational expectations models," Journal of Econometrics, Elsevier, vol. 41(1), pages 65-89, May.
    23. Hallin, Marc & Liska, Roman, 2007. "Determining the Number of Factors in the General Dynamic Factor Model," Journal of the American Statistical Association, American Statistical Association, vol. 102, pages 603-617, June.
    24. Stock, James H. & Watson, Mark W. (ed.), 1993. "Business Cycles, Indicators, and Forecasting," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226774886, September.
    25. Jushan Bai, 2003. "Inferential Theory for Factor Models of Large Dimensions," Econometrica, Econometric Society, vol. 71(1), pages 135-171, January.
    26. Jushan Bai & Serena Ng, 2006. "Confidence Intervals for Diffusion Index Forecasts and Inference for Factor-Augmented Regressions," Econometrica, Econometric Society, vol. 74(4), pages 1133-1150, July.
    27. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Stock, J.H. & Watson, M.W., 2016. "Dynamic Factor Models, Factor-Augmented Vector Autoregressions, and Structural Vector Autoregressions in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 415-525, Elsevier.
    2. Mark W. Watson & Ricardo Reis, 2007. "Measuring changes in the value of the numeraire," 2007 Meeting Papers 324, Society for Economic Dynamics.
    3. Catherine Doz & Peter Fuleky, 2019. "Dynamic Factor Models," Working Papers 2019-4, University of Hawaii Economic Research Organization, University of Hawaii at Manoa.
    4. Stock, James H. & Watson, Mark, 2011. "Dynamic Factor Models," Scholarly Articles 28469541, Harvard University Department of Economics.
    5. Matteo Barigozzi & Antonio M. Conti & Matteo Luciani, 2014. "Do Euro Area Countries Respond Asymmetrically to the Common Monetary Policy?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 76(5), pages 693-714, October.
    6. Poncela, Pilar & Ruiz, Esther & Miranda, Karen, 2021. "Factor extraction using Kalman filter and smoothing: This is not just another survey," International Journal of Forecasting, Elsevier, vol. 37(4), pages 1399-1425.
    7. Barigozzi, Matteo & Hallin, Marc & Luciani, Matteo & Zaffaroni, Paolo, 2024. "Inferential theory for generalized dynamic factor models," Journal of Econometrics, Elsevier, vol. 239(2).
    8. Jörg Breitung & In Choi, 2013. "Factor models," Chapters, in: Nigar Hashimzade & Michael A. Thornton (ed.), Handbook of Research Methods and Applications in Empirical Macroeconomics, chapter 11, pages 249-265, Edward Elgar Publishing.
      • In Choi & Jorg Breitung, 2011. "Factor models," Working Papers 1121, Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy), revised Dec 2011.
    9. Alberto Humala & Gabriel Rodr�guez, 2012. "A factorial decomposition of inflation in Peru: an alternative measure of core inflation," Applied Economics Letters, Taylor & Francis Journals, vol. 19(14), pages 1331-1334, September.
    10. Kihwan Kim & Norman Swanson, 2013. "Diffusion Index Model Specification and Estimation Using Mixed Frequency Datasets," Departmental Working Papers 201315, Rutgers University, Department of Economics.
    11. Mario Forni & Luca Gambetti & Luca Sala, 2014. "No News in Business Cycles," Economic Journal, Royal Economic Society, vol. 124(581), pages 1168-1191, December.
    12. Pellényi, Gábor, 2012. "A monetáris politika hatása a magyar gazdaságra. Elemzés strukturális, dinamikus faktormodellel [The sectoral effects of monetary policy in Hungary: a structural factor]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(3), pages 263-284.
    13. Forni, Mario & Gambetti, Luca, 2010. "The dynamic effects of monetary policy: A structural factor model approach," Journal of Monetary Economics, Elsevier, vol. 57(2), pages 203-216, March.
    14. Pilar Poncela & Esther Ruiz, 2016. "Small- Versus Big-Data Factor Extraction in Dynamic Factor Models: An Empirical Assessment," Advances in Econometrics, in: Dynamic Factor Models, volume 35, pages 401-434, Emerald Group Publishing Limited.
    15. Jushan Bai & Kunpeng Li & Lina Lu, 2016. "Estimation and Inference of FAVAR Models," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 34(4), pages 620-641, October.
    16. Heaton, Chris & Solo, Victor, 2012. "Estimation of high-dimensional linear factor models with grouped variables," Journal of Multivariate Analysis, Elsevier, vol. 105(1), pages 348-367.
    17. Matteo Luciani, 2015. "Monetary Policy and the Housing Market: A Structural Factor Analysis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 30(2), pages 199-218, March.
    18. Bai, Jushan & Wang, Peng, 2012. "Identification and estimation of dynamic factor models," MPRA Paper 38434, University Library of Munich, Germany.
    19. Karim Barhoumi & Olivier Darné & Laurent Ferrara, 2014. "Dynamic factor models: A review of the literature," OECD Journal: Journal of Business Cycle Measurement and Analysis, OECD Publishing, Centre for International Research on Economic Tendency Surveys, vol. 2013(2), pages 73-107.
    20. Borus Jungbacker & Siem Jan Koopman, 2008. "Likelihood-based Analysis for Dynamic Factor Models," Tinbergen Institute Discussion Papers 08-007/4, Tinbergen Institute, revised 20 Mar 2014.

    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

    Lists

    This item is featured on the following reading lists, Wikipedia, or ReplicationWiki pages:
    1. Relative Goods' Prices, Pure Inflation, and the Phillips Correlation (AEJ:MA 2010) in ReplicationWiki

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aejmac:v:2:y:2010:i:3:p:128-57. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.