Hostname: page-component-8448b6f56d-qsmjn Total loading time: 0 Render date: 2024-04-22T17:47:34.977Z Has data issue: false hasContentIssue false


Published online by Cambridge University Press:  05 February 2020

Xue Li
Southwestern University of Finance and Economics
Joseph H. Haslag*
University of Missouri
Address correspondence to: Joseph Haslag, Department of Economics, University of Missouri-Columbia, Columbia, MO 65211, USA. e-mail: Phone: 573-882-3482. Fax: 573-882-2697.


The purpose of this paper is to focus directly on the phase shift. For one thing, we ask whether a New Keynesian sticky-price model economy can account for both countercyclical prices and procyclical inflation. We present findings in which the price level is countercyclical and the inflation rate is procyclical. We proceed to use the model economy as an identification mechanism. What set of individual shocks are necessary to account for the phase shift? That set contains the price markup shock. Next, we ask what set of shocks are sufficient to account for the phase shift. This set contains three elements: the price markup and wage markup shocks along with the government spending shock. The results are important as a building block. We infer that price stickiness is an important model feature; without price stickiness, we are in the real business cycle economies that Cooley and Hansen studied. But, it raises further questions. For instance, is price stickiness of the Calvo form—the one used here—necessary to explain the phase shift?

© Cambridge University Press 2020

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)


The authors wish to thank William Brock, Jesus Fernandez Villaverde, Patrick Minford, and an anonymous referee for helpful comments. Any remaining errors are solely the authors. Xue Li would like to acknowledge financial support from the National Natural Science Foundation of China (71903153) and Ministry of Education of China’s Humanities and Social Science Research (17XJC790006).



Ashley, R., Granger, C. W. J. and Schmalensee, R. (1980) Advertising and aggregate consumption: An analysis of causality. Econometrica 48, 1149–268.CrossRefGoogle Scholar
Blanchard, O. and Watson, M. (1986) Are all business cycles alike? In: Gordon, R. J. (ed.), The American Business Cycle: Continuity and Change, pp. 123180. Cambridge, MA: National Bureau of Economic Research.Google Scholar
Branch, W. A., Carlson, J., Evans, G. W. and McGough, B. (2009) Monetary policy, endogenous inattention, and the volatility trade-off. Economic Journal 119, 123157.CrossRefGoogle Scholar
Brock, W. and Hommes, C. (1997) A rational route to randomness. Econometrica 65, 10591095.CrossRefGoogle Scholar
Brock, W. A. and Haslag, J. H. (2016) A tale of two correlations: Evidence and theory regarding the phase shift between the price level and output. Journal of Economic Dynamics and Control 67, 4057.CrossRefGoogle Scholar
Cooley, T. F. and Hansen, G. D. (1995) Money and the business cycle. In: Cooley, T. F. (ed.), Frontiers of Business Cycle Research, pp. 175216. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
Cooley, T. F. and Ohanian, L. (1991) The cyclical behavior of prices. Journal of Monetary Economics 28, 2560.CrossRefGoogle Scholar
De Grauwe, P. (2011) Animal spirits and monetary policy. Economic Theory 47, 423457.CrossRefGoogle Scholar
DeJong, D. N., Ingram, B. F. and Whiteman, C. H. (1996) A Bayesian approach to calibration. Journal of Business and Economic Statistics 14, 19.Google Scholar
Den Haan, W. J. (2000) The comovement between output and prices. Journal of Monetary Economics 46, 330.CrossRefGoogle Scholar
Farmer, R. E. A. (2016) The evolution of endogenous business cycles. Macroeconomic Dynamics 20, 554557.CrossRefGoogle Scholar
Friedman, M. and Schwartz, A. J. (1963) A Monetary History of the United States, 1867-1960. Princeton, NJ: Princeton University Press.Google Scholar
Hamilton, J. D. (2017) Why You Should Never Use the Hodrick-Prescott Filter. NBER Working Paper No. 23429.CrossRefGoogle Scholar
Haslag, J. H. and Hsu, Y.-C. (2012) Cyclical co-movement between output, the price level, and the inflation rate. Advances in Econometrics 30, 359384.CrossRefGoogle Scholar
Ireland, P. N. (2003) Endogenous money or sticky prices? Journal of Monetary Economics 50, 16231648.CrossRefGoogle Scholar
Keating, J. W. and Valcarcel, V. J. (2015) The time-varying effects of permanent and transitory shocks to real output. Macroeconomic Dynamics 19, 477507.CrossRefGoogle Scholar
King, R. G. and Watson, M. W. (1996) Money, prices, interest rates and the business cycle. Review of Economics and Statistics 78, 3553.CrossRefGoogle Scholar
Kydland, F. E. and Prescott, E. C. (1990) Business cycles: Real facts and a monetary myth. Federal Reserve Bank of Minneapolis Quarterly Review 14, 318.Google Scholar
Maćkowiak, B. and Wiederholt, M. (2009) Optimal sticky prices under rational inattention. American Economic Review 99, 769803.CrossRefGoogle Scholar
Moscarini, G. (2004) Limited information capacity as a source of inertia. Journal of Economic Dynamics and Control, 28, 20032035.CrossRefGoogle Scholar
Ross, S. M. (2014) Introduction to Probability and Statistics for Engineers and Scientists, 5th ed. Boston, MA: Academic Press.CrossRefGoogle Scholar
Sims, C. (2003) Implications of rational inattention. Journal of Monetary Economics 50, 665690.CrossRefGoogle Scholar
Smets, F. and Wouters, R. (2007) Shocks and frictions in US business cycles: A Bayesian DSGE approach. American Economic Review 97, 586606.CrossRefGoogle Scholar
Uhlig, H. (2018) Money and banking: Some DSGE challenges. Unpublished manuscript.Google Scholar
Woodford, M. (2003) Interests and Prices: Foundations of a Theory of Monetary Policy. Princeton, NJ: Princeton University Press.Google Scholar
Wu, J. C. and Xia, F. D. (2016) Measuring the macroeconomic impact of monetary policy at the zero lower bound. Journal of Money, Credit and Banking 48, 253291.CrossRefGoogle Scholar
Wu, J. C. and Zhang, J. (2017) A Shadow Rate New Keynesian Model. Chicago Booth Research Paper No. 16–18.Google Scholar
Supplementary material: PDF

Li and Haslag supplementary material

Online Appendix

Download Li and Haslag supplementary material(PDF)
PDF 973.8 KB