On the Cyclical Behaviour of Prices

Abstract

This paper puts forward the proposition that, contrary to the prevailing conventional wisdom, there is no stylised fact about the cyclical behaviour of prices. It is argued that the empirical evidence on the issue is mixed and that the cyclical behaviour of prices is ambiguous because of the randomness of the occurrence of shocks. It is also argued that both supply and demand shocks can cause prices to be either procyclical or countercyclical depending on the policy response. Finally, it is shown that the issue is complicated further by the problem of temporal aggregation bias.