The time-varying correlation between output and prices in the United States over 1800 to 2014

In this study, we examine the time-varying correlations between output and prices, while controlling for the impact of monetary policy stance, and output and inflation uncertainties over the period of 1800-2014. The results of the empirical analysis reveal that dynamic correlations of output and prices were typically negative, suggesting a countercyclical behaviour of prices, apart from the early 1840s, and from the beginning till the mid of the 20th century, wherein correlation were positive, indicating the procyclicality of prices. A historical decomposition analysis based on a sign-restricted structural vector autoregressive model is able to relate the procyclical and countercyclical behavior to the predominance of aggregate supply, and aggregate demand and/or monetary policy shocks, respectively. Moreover, inflation uncertainty (monetary policy stance) was found to have a positive (negative) effect on inflation over the last 215 years.