BUSINESS-CYCLE SOURCES AND PRICE LEVEL-OUTPUT CORRELATION

This paper shows that predominantly aggregate demand- (supply-) driven output fluctuations are consistent with a negative (positive) correla tion between the price level and output, but only if aggregate supply is flatter (steeper) than aggregate demand. These results bold even wi th zero covariance between demand and supply shocks, and these conflue nces are more likely to occur for algebraically higher values of the c orrelation between demand and supply shocks. Thus care should be taken in using observed signs of price level-output correlations to draw in ferences about the validity of supply- or demand-based macro theories.