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The Relationship between Prices and Output in the UK and the US

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  • Guglielmo Maria Caporale
  • Gloria Claudio-Quiroga
  • Luis A. Gil-Alana

Abstract

This paper analyses the relationship between CPI and real GDP in both the US and the UK using fractional integration and long-range dependence techniques. All series appear to be highly trended and to exhibit high degrees of integration and persistence, especially in the case of CPI. Since the two variables have different degrees of integration in each of the two countries, fractional cointegration tests cannot be carried out. We assume instead weak exogeneity of each of them in turn and test for causality by regressing the other variable against lagged values of the weakly exogenous one. We find that the only significant relationship implies the existence of a lagged effect of prices on output in the case of the US, which suggests a dominant role for demand shocks.

Suggested Citation

  • Guglielmo Maria Caporale & Gloria Claudio-Quiroga & Luis A. Gil-Alana, 2021. "The Relationship between Prices and Output in the UK and the US," CESifo Working Paper Series 8970, CESifo.
    • Handle: RePEc:ces:ceswps:_8970
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    More about this item

    Keywords

    real output; prices; persistence; fractional integration;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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